Penetrating China in 2023 is a Suicide? Here are 6 reasons speaking the opposite
The last two years were challenging for China to say the least. COVID hit in early 2020. I was there, I saw the panic, I saw businesses not ready to shift to remote mode and having to pause all activities for a while. We were lucky to be mobile at that time and succeeded in going fully remote within the first days keeping the service on the same level. The first lockdowns in China were efficient enough and right after a few weeks, when the whole world was shocked and slowly started shutting down, life in China seemed to normalize and people, as well as businesses, moved on. Little did we know back then. Lockdowns came back harsh in 2022. Our employees along with many others couldn't leave their apartments, food supply became an issue. It couldn't mean anything but an economic slowdown. Whole industries had to stop their activities. Some restrictions were lifted this summer, however, no one could name it going back to normal. China faced rapid unemployment growth with businesses cutting budgets and even going bankrupt. Many foreigners left the country and even more still can't come back due to strict entry rules caused by COVID-zero policy. Everyone was waiting for the big 2022 Party Congress (二十大）to bring some light to the future and it did the opposite. Instead of lifting restrictions and economy boost plans, we got conspiracy theories, China-US rivalry talks, and the Taiwan issue rising high as ever before. All this led to foreign investors being extremely cautious about China. Once one of the most attractive markets to invest in now seems too risky and unclear. We see some reducing China-related assets in their portfolios while others completely withdrawing operations from the market.
All the noise generated by media and word of mouth screams quite directly: "Avoid China!" Let's try to mute it for a minute and analyze certain aspects of the market and its economy to see whether China is worth taking a look at during your expansion planning for 2023.
Recent data showed China's GDP grew by 3.9% in the third quarter beating expectations. Foreign trade rose by 8.3% in September with export increasing by 10.7%, and imports rising by 5.2%, according to the official data. Some would say these numbers are too low for China. Well, probably, we are watching a slowdown for sure compared to pre-COVID results. But this country was in lockdown for months, whole industries had to stop operations, and people could not leave their apartments. At the same time, we see more and more signs of recession in the world's largest economies. To me, this shows nothing but China's ability to recover. What is more important it shows its dedication to economic growth, and they speak directly about it.
China's main focus is economic development with the goal to double GDP per capita by 2035. The economic growth of 3.9% was driven mainly by infrastructural investment and industrial output while retail sales and unemployment are still to be improved and the government doesn't hide it. They stress out the weak areas of economic development and show clear signs of working out plans to boost those areas. Li Keqiang, who is now confirmed to step down as a premier, pinpointed the necessity of supporting demand and boosting consumption for further stabilization of the economy.
"Overall, the policy package for stabilizing the economy and the follow-up policies are forceful and are warmly welcomed by localities. Mature projects should be taken forward without delay, and the approval procedures for projects that can get started within the year should be simplified wherever possible," Li said.
There are a few policies that sounded quite reassuring to me but we will see how they work out quite soon. The main point here is that, although there are still discussions on the ways to reboot the economy, China is devoted to it and makes it its main priority.
Foreign direct investment (FDI) was one of the main pillars of the Chinese economic miracle. We are in doubt whether its stay as such now. However, NDRC actually issued 15 measures to boost FDI including easing travel for expats. I'm not sure if that's enough to change investors' mood back but FDI showed a direct impact on China's economy, and they did not forget about it. One shall not doubt China will do its best to put up that pillar back and we are already seeing the first steps in that direction.
At the same time, long-term investors are eying China right now. Fung capital together with Bahrain's Investor Corp announced a new $500 mln fund to invest in mid-cap companies across China’s Greater Bay Area (GBA).
" There is big potential, particularly, for GBA-centered mid-cap companies with innovative products and services targeting Asian but also global customers to be grown into significantly larger players,” said Mohammed Alardhi, Investcorp’s Executive Chairman.
And they are not alone. BOCHK Asset Management Limited announced the launch of “BOCHK All Weather HK & China Equity Fund". The fund is raising cash from outside investors and "offers investors an opportunity to benefit from the currently low valuation of the Hong Kong and the Mainland of China-related equity markets in the short-term and enjoy capital growth in the long run", according to its press release.
Now let's talk about that US-China rivalry but once again blocking that noise and conspiracy theories. Despite all the whistleblowers, export to the US grew by 10.1% for the first 8 months of the year. Everyone was expecting a decline in exports to the US but in fact, the US is deeply dependent on Chinese goods which is once again proven here. Moreover, the USA recently issued its National Security Strategy which is rather mentioning China as an equal competitor than an enemy. Actually, it has nothing close to calling China an enemy. There is a direct quote that makes it quite obvious what that rivalry actually is:
" It is possible for the United States and the PRC to coexist peacefully, and share in and contribute to human progress together."
Although foreigners seem to be leaving China right now, locals are almost locked inside. The consumer market is still as huge as it was before the pandemic and potentially is even bigger at the moment. All Chinese consumption and investment are now focused on the domestic market. Add to this Li's words about supporting consumption and you end up with a huge potential for penetration here as well.
The entry barriers are higher than in 2019 no doubt. However, China just showed its ability to recover as well as its dedication to it. First policies to boost economic growth are being developed and some are already issued. The consumer market is larger than ever before. Some investors already saw the opportunity there. So is it the time to buy low and "enjoy capital growth in the long run"? It is always scary not to follow the crowd but remember only dead fish follows the current.