Breaking Up with China: A Love-Hate Relationship

China's prospects impacted by West's de-risking measures

West’s de-risking affects China’s prospects.

Beijing/Hong Kong, Nov 28 (ANBLE) – U.S. furniture company head Jordan England is having a tough time deciding between love and war with his Chinese suppliers. While acknowledging their prowess, the impact of geopolitics and a waning economy have pushed him to flirt with other regions. “I’m looking to move away from it (China),” said England, CEO, and co-founder of Florida-based Industry West. The “China plus one” strategy, implemented after trade tariffs were imposed by Washington in 2018, aimed to diversify suppliers away from China to minimize dependency. Now, it’s evolved into a “plus-10” strategy, with China being downsized in Industry West’s sourcing efforts. The souring relationship between foreign investors and China has caused significant ramifications, as evidenced by recent data releases impacting the world’s second-largest economy.

The Chinese Tango: Manufacturing Contracts, Exports Decline

Activity surveys in October unveiled an unexpected contraction in manufacturing, while exports experienced a decline. China recorded its first-ever quarterly deficit in foreign direct investment during July-September, suggesting capital outflows. Nicholas Lardy, senior researcher at the Peterson Institute for International Economics, has remarked on the potential implications of these trends. He highlights that foreign firms are not only declining to reinvest earnings but also selling existing investments and repatriating funds. This unsettling trend has the potential to further weaken the yuan and hinder China’s economic growth potential.

Concerns Beyond Geopolitics: Long-Term Growth Prospects

Geopolitics, regulations, and favorable conditions for state-owned companies have long been concerns for businesses operating in China. However, for the first time in four decades, long-term growth prospects have emerged as a significant worry. According to a survey released by The Conference Board, more than two-thirds of responding CEOs stated that China’s demand has not fully recovered from the impact of COVID-19. Additionally, 40% of executives expect a decrease in capital investments in China over the next six months, with a similar proportion anticipating job cuts. While China remains outwardly confident about growth, foreign investors like Jordan England express concerns about the fate of Chinese suppliers amid the country’s severe property market downturn.

The Open Invitation: A Skepticism Tango

Premier Li Qiang’s overtures declaring China “open for business” have been met with skepticism in Western boardrooms. Broader concerns surrounding anti-espionage laws, raids on consultancies, due diligence firms, and exit bans have cast a shadow of doubt. China’s inaugural China International Supply Chain Expo, scheduled for Tuesday, is expected to be used as a platform to showcase China’s supply chain advantages, reinforcing Li’s invitation. While foreign businesses continue to desire a presence in China, boards back in the U.S. remain wary. European firms have also raised concerns regarding fair competition and state-directed lending to Chinese manufacturers. Additionally, the detention of two Canadians from 2018 to 2021 has left “bad blood” with Canada.

The Diversion Game: Capital Flows to Other Regions

In private equity, China-focused buyout funds have suffered a setback. Data from Preqin reveals that as of November 24, no China-focused buyout fund had been raised in 2023, compared to $210 million in 2022 and a staggering $13.2 billion in 2019. Mounting macroeconomic uncertainty, a murky capital market outlook, and concerns over past regulatory crackdowns have led to a diversion of capital from China to Southeast Asia, Australia, and Europe. Fred Hu, founder of Primavera Capital, highlights the impact on tech firms and private enterprises, emphasizing the need for financing and liquidity from public markets. Despite the challenges, foreign investment flows are not unidirectional, as many firms, especially in the retail sector, continue to target China’s vast market.

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Love in the Time of Uncertainty

While businesses navigate the complexities of economic and political uncertainties in China, their love affair with the Chinese market endures. McDonald’s recently announced a deal to boost its stake in its China business, a testament to their commitment. An anonymous executive from a European hotel chain expressed contentment in reinvesting profits in China, acknowledging the prevailing challenges but adopting a “wait and see approach.”

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What are your thoughts on the shifting dynamics of foreign investments in China? Are you inclined to explore other regions as well? Share your experiences and opinions below!

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