The relaxation of China's one-baby policy, which has spurred
expectations of rising demand for food, and in particular dairy, may not prove
as supportive as many believe, Credit Suisse said, trimming its hopes for Danone
Many commentators have said that Chinese birth rates will
rise significantly thanks to the relaxation of rules limiting families to one
child, with the University of California foreseeing a rise of up to 2m birth a
Indeed, the immediate market impact of the announcement was
to send shares soaring in Chinese dairy groups such as milk powder maker Yashili
International and China Mengniu Dairy.
However, Credit Suisse said that the rise in births may
actually come in below 1.2m a year, a factor curtailing the boost to dairy
Reasons for doubt
In fact, nearly two-thirds of Chinese families are already
exempt from strict one-baby polices, given exceptions already applied in rural areas
for those whose first child is a girl, for some ethnic minorities, and for
couples where both parents are only children.
Indeed, the Chinese fertility rate, which the World Bank
sees as 1.7 children per couple, is already relatively high, and well above
rates of 1.1 in Hong Kong and Taiwan.
Economic factors "will also play a role" in limiting the
birth rate, with 68% of women working, while the potential for huge bureaucracy
in gaining permission for a second child may also act as a deterrent, Credit
The prospect of a limited impact was also supported by
survey evidence that few couples desire an extra child, and with precedents in
Ghangzhou and Nanjing, where rules were relaxed in 2000, showing only a small increase
in birth rates by 2009, o f1.4% and 0.7% respectively.
The comments came as the bank lowered by E3 to E46 its
target price for shares in France-based Danone, a major supplier to the Chinese
baby nutrition market, while keeping an "underperform" rating on the stock.
The group, which operates in China through the Dumex brand,
has also suffered from the fallout of the Fonterra milk powder contamination
furore in August which, while ultimately proving unfounded, raised food safety
concerns over product from companies such as Danone which use it.
Dairy group shares of Chinese infant formula market
Mead Johnson: 16%
Source: Credit Suisse. Mead Johnson
"The experience of the local brands which have struggled to
recover from 2008's melamine contamination scandal shows how fragile that
confidence is and how hard it is to win in back," the bank said.
Furthermore, foreign milk powder suppliers face pressure
from authorities to limit prices - which cost twice as much in China as in markets
such as France, Russia and the UK, according to Credit Suisse – and from efforts
to step up competition by creating a domestic dairy champion.
Indeed, the bank highlighted a preference for China Mengniu,
in which Danish-based Arla took a 5% stake last year, as its "favoured play" on
China's dairy market.
"By leveraging Arla's product knowhow and Yashili's extensive
distribution network, we believe Mengniu is well positioned to capitalize on
China's fast growing demand for infant milk and one-child policy change," the
China Mengniu shares closed down1.1% at HK$25.30 in Hong
Kong on Thursday.
Danone shares were 0.3% lower at E51.32 in lunchtime deals