On the surface, the status quo seems straightforward enough for pretty much any nation, not easy to tackle by any means but straightforward nonetheless: we had a medical calamity which generated unprecedented (in terms of its globalized nature, if you will, but more on the globalization dimension a bit later on) economic shutdown scenarios and once the medical part of the equation is properly understood even if not behind us, we analyze the direct effects of the shutdown in question in an effort to tackle the issue as best we can.

Unfortunately, while the above analytical framework may make sense for most countries, that is not the case for China because the economic dimension tends to be much more complex in its case due to the essential “role” the country had when it comes to the COVID-19 calamity. For the most part, here are the main areas of concern, as we see them at least:

1. Yes, the fact that the COVID-19 episode and the subsequent economic lockdown measures represented a very potent deflationary force which came on top of an already worrying trend in China when it comes to economic growth. Just as the market as well as Communist Party of China was coming to terms with the fact that the pre-2010 days of double-digit growth are long gone, the powerfully deflationary force represented by the pandemic added gasoline to a timid flame, gasoline which risks jeopardizing the fragile balance which was found in the case of China
2. The fact that just as China was on the receiving end in terms of globalization to such a degree that it was considered a let’s call it spoiled child of it (perhaps the number one spoiled child, at that), the same China risks being on the very losing end if the proverbial foot is taken off the table at the very least, let’s not even mention scenarios in which key politicians from various countries decide that the COVID-19 situation taught humanity a lesson, a lesson which revolves around the fact that “too much globalization” leads to an overly-complex supply chain and in times of trouble such as what the world experienced in 2020, the effects cannot help but be felt… with the main takeaway being that not only should our foot be taken off the pedal in terms of globalization but a downright course reversal should be considered, at least when it comes to goods/services relevant to national security
3. The fact that as it was, skepticism surrounding any figures coming from China abounded or in other words, that trust in Beijing’s reporting was lackluster at best. In some cases, these concerns were justified whereas in others, they ventured into conspiracy theory territory. In light of the fact that China’s initial handling of the coronavirus problem and poor subsequent communication left much to be desired, we are once again in a situation which revolves around gasoline being poured over an already dangerous fire, this time one that has to do with the trust of various trading partners in the figures which come from China
4. The fact that complaints pertaining to anything from sub-par testing kits provided by China to ineffective medical equipment raise concerns about the already lingering product quality dimension associated with China’s exports, concerns China has spent not years but downright decades fighting

… the list could go on and on.

Suffice it to say that for the four previously outlined reasons and many more, jumpstarting China’s economy poses challenges one can consider… well, unique. Challenges which aren’t just related to the monetary and fiscal stimulus dimension but which also have to do with the political one, with there being two dimensions worth highlighting:

1. China’s proven mistakes when it comes to its (especially initial) handling of the coronavirus problem, mistakes that have been covered in detail by medical experts and make it clear that no, China definitely has a more than noticeable degree of guilt in the entire equation
2. “Invented” mistakes that are attributed to China by politicians of various nations, in an effort to shift the public’s attention away from their own faults. Unfortunately, it is abundantly clear that the West failed the COVID-19 test more so than the East, for a wide range of reasons, from the unwillingness of Western authorities to impose measures as harsh as those chosen in China to the behavior of the general public, who refused to comply to a much greater degree than Chinese citizens, South Korean citizens, Japanese citizens, Singaporean citizens and so on… a harsh reality that brings about many political implications and as such, it should come as no surprise that politicians are eager to find an enemy they can channel negative energy toward so as not to, well, risk becoming the enemy in question themselves

Can China jumpstart its economy?

Of course.

However, those who either own Chinese assets or are at the very least interested in gaining exposure to them need to understand the particularities of this goal when it comes to China. More specifically, it is vital to come to terms with the fact that despite the general perception that China handled things a lot better than the West, the equation is far more complex than meets the eye and the long-term implications should therefore not be under-estimated. There will be economic consequences, there will be political consequences and those who do not prepare accordingly by optimizing their strategies risk being caught off guard, something the ChinaFund.com team is happy to help clients avoid.

“The stock market is a tool that’s designed to transition wealth from the impatient to the patient”

If you frequent our blog then you know that we are very bullish on the potential of China as the next big investment opportunity. Even though their economy has been growing at unprecedented rates since 1980, we don’t think that they’re done yet. Over the next couple of decades, their country and economy will most likely continue to see amazing growth and those who position themselves aggressively are poised to do quite well.

We want to help you make informed decisions on how you can invest in China over the next few years. Since we just started a new decade, we thought it would be a good time to focus on 5 trends that we expect to see in the business landscape in China over the 2020s.

These are 5 China trends to watch out for the 2020s:

Increased Free Market Activity

In 1978, China implemented changes to their economy that allowed them to transition to more of a free market. Citizens were given the freedom to create their own enterprises and the government retracted their control (slightly). Prior to these reforms, things like production levels and prices were mandated by the government. This meant that business owners had no control over price, quality or how much of their product they could build and sell. These changes were clearly very good for China and allowed their economy to grow an unprecedented rate. In fact, their economy has been doubling every 8 years since the 1980s.

It’s worth noting that these same types of free-market regulations were exactly what lead to the United States becoming the economic powerhouse that it is today.

Even though China is still very much a communist* country, you’re likely to see more of a transition toward free-market policies. During just the short time from 1980 to now, China has had an unprecedented number of people escape poverty and is now the world’s #2 economy. This economic success shows the power of capitalism and will encourage leaders to deregulate the economy even further.

According to Chinese economist Zhang Weiying, China’s success in recent years has “not been because of the state, but in spite of the state.” It’s most likely clear to many citizens that free markets are what have allowed China to grow at the rate they have. They will likely pressure the government into deregulating the economy and allow more and more entrepreneurs to stake their claim.

The Chinese government has also come out (in the wake of the coronavirus) and stated that they want to attract more foreign investment. One of the main ways to do just that revolves around open policies and fewer regulations.

That being stated, China is still a communist country and their government will most likely always have a hand in what is being done in the private sector. That brings us to our next trend:

More Governmental Control

Despite a more deregulated business environment, expect more government control over their private enterprises. These may seem like two conflicting statements but here is what we mean: although the landscape will be open for more people to start their own business, the government will take a stronger role in monitoring the private sector (as the private sector continues to grow).

For example, we have already seen this a little bit with things like:

1. The government’s decision to place government figures on the boards of hundreds of private companies. It can only be assumed that this is to make sure that private companies are acting in the best interests of the country
2. The introduction of China’s new cybersecurity infrastructure. This new infrastructure will offer private companies no privacy or if you will, no place to hide information from the government. Everything that gets put online, gets offered to the government on a silver platter

The Chinese government and the U.S. government are both also interfering in open trade between the two countries in response to the trade war. Both countries have imposed tariffs on one another and just reached Phase One of a deal.

Despite opening the economy for private enterprise, the Chinese government will still want total control in regulating what those businesses do and how they do it. This is true for foreign companies looking to enter China as well (many U.S.-based companies are still banned from doing business in China).

Transition Toward eCommerce

This is a worldwide trend but will be particularly true for China. This is because China is already the world’s leading manufacturer and exporter. They’re also already home to Alibaba, one of the world’s top eCommerce companies. The two companies JD.com and Pinduoduo are also growing rapidly and are even projected by some to become larger than Alibaba.

This trend toward eCommerce will most likely be accelerated by the coronavirus. Now that people are being forced to stay at home and quarantine, they will have little choice but to order things online. Companies that do not offer eCommerce options will be forced to either adapt or go out of business.

ECommerce is also projected to venture into other industries aside from just retail. In the U.S., grocery and food delivery is gaining steam fast. Undoubtedly, over the next 10 years, other companies outside of retail will do what they can to introduce eCommerce into their own industry.

Long-Term Effects of COVID-19

Speaking of the coronavirus, the spread of the disease will most likely have a lasting impact on China’s economy for at least a few years to come. Already, China’s GDP has shrunk in Q1 of 2020 by 6.8%, which was the first contraction in 40 years. China recently reported that their GDP grew by 3.2% in Q2 of 2020, which would imply that they are already recovering from the damaging effects of the pandemic. However, many are skeptical of these numbers.

The country (as well as the U.S.) is at a critical point in handling the virus as well. In the United States, the virus isn’t contained very well and government aid is starting to run out. China, since they have been somewhat coy about releasing their economic data, could be in a similar position when it comes to:

1. Government aid – There may need to be more aid in the form of bailouts or increased unemployment benefits, as explained through another article
2. Potential layoffs – China has already made it clear that private companies are to avoid layoffs at all costs. This means that more bailouts could be on the way so that companies can avoid laying off employees

Additionally, some doctors believe the coronavirus is something that could turn into a seasonal event, similar to the common flu. During some months it will be dormant, only for cases to surge again when the seasons change. If this is the case, it will be doubtful that countries will go into full quarantine every time the virus emerges. However, productivity could still suffer during times of the year when the virus is more prevalent.

More Pressure on the Global Stage

As China has now grown into the world’s second-largest economy, there is more pressure for them to conform to the whims of other countries. This has become increasingly apparent with aspects such as their trade war with the United States, the pressure to stop currency manipulation and pressure to curb their country’s carbon emissions. When it comes to their private sector, there are a few companies which are coming under a global microscope as well, such as:

1. TikTok – Although this situation is ongoing, TikTok is a social media company (one of the fastest growing social media companies of all time, in fact) that allows users to record and post short videos. However, they are now coming under scrutiny due to allegedly being used by the Chinese government for surveillance
2. Huawei – The same is true of the microchip company Huawei (this is another situation that is ongoing). They are expected to play a major role in creating the 5G infrastructure that is going up around the world. However, many countries are skeptical that they send information to the government. Some countries have even gone so far as to ban doing business with Huawei

As China continues to grow, there will be more and more pressure on them to be wary of their actions and how they are viewed by other countries. This is both a good and a bad development because it means that they are in a position of economic power but also need to adhere to global requirements.

We hope that you’ve found this article valuable when it comes to understanding some trends to watch out for in China for the 2020s. If you’re interested in reading more, please follow the ChinaFund.com blog and take a look at the “New Here?” section of our website if you haven’t by now.

How countries handled (or are handling) the outbreak of this pandemic will pave the way for their economies for the next few decades. Some countries have performed better and have already been able to open up, while others are still counting cases. If you’re an investor, you’re probably wondering how this virus is impacting the potential to invest in a country in the years ahead.

This is our coronavirus economic prediction for China and what it will mean for their country for years to come.

Wuhan, China

Before we get started, it’s important to note that the coronavirus poses two threats to countries. First, there is the public health threat that people will get sick from a disease which could potentially be fatal if they don’t receive the proper treatment. Second, there is the economic threat that is brought on by orders from the government for citizens to stay at home and for businesses to shut down (temporarily). These measures were put in place to slow the spread of the virus.

If the health crisis isn’t dealt with effectively, then it could have lasting effects on the economy of a country. However, the longer that people are forced to quarantine and stay home, the more monetary assistance they will need. This is the dilemma that most countries are dealing with. Let’s take a look at the place where the virus is widely considered to have started: Wuhan, China.

Being ground zero for a disease that turned into a global pandemic is never a good thing. The fact that the virus started in China is not a very good sign for their economic recovery because it means that the virus is very prevalent there. This could potentially mean more people infected and longer recovery times. However, at this stage in the spread of the virus, it’s almost irrelevant where the virus started because it’s so widespread and has reached almost all edges of the map.

While China being ground zero isn’t a good thing by any means, at this point it probably doesn’t really matter.

Let us now take a look at what China has reported about the virus up to this point (this article was written on July 6th) and try to put the data under the proverbial microscope.

What China Has Reported

According to the most recent data, China has reported:

➢ 83,557 cases
➢ 4,634 deaths
➢ 78, 518 recoveries

However, the main thinking is that China has not been 100% transparent in their data related to the coronavirus and may have either fabricated or omitted key numbers. One of the main reasons for the skepticism is that the numbers and statistics reported fall outside recognized and accepted medical norms.

There were simply too many cases reported at once and the drop off was too sudden to be believable. They have drawn criticism from the WHO as well as other countries for not releasing pressing information related to the virus. Donald Trump, in particular, has been vocal that China suppressed data which could have helped the U.S. better prepare to fight the pandemic.

The following graph from Google shows the reported stats from China:

The WHO (World Health Organization) has also claimed that they had difficulty getting information from China. At first, it seemed as though China was doing a good job of handling the virus, but later they mentioned that they felt like they were getting critical information just 15 minutes before that same information was appearing on public television in China. Considering the fact that they were trying to alert other countries of the most recent information on the virus and create a global awareness and response plan, they felt that they should have received this information sooner. It was almost as though China waited until the last possible moment to release valuable information and, instead, chose to sit on this information for up to a week at a time.

Refused to Release an Economic Prediction

Recently, China shocked the economic and business world by refusing to release an economic prediction for 2020. This broke a precedent that has been around for years and is a sign that they are having more trouble jumpstarting their economy than they might be letting on. This doesn’t exactly mesh with their reports that they have done an outstanding job containing the virus.

There are two ways to interpret this, from the eyes of a foreign investor:

1. Uncertainty – The leadership in China is just very, very uncertain as to how things are going to play out in terms of their economic response to the coronavirus. This also implies that things are still “playing out”, meaning that they aren’t out of the woods yet and there is still a risk of a second wave of the virus
2. They’re hiding something – Either China’s leadership is truly uncertain about how things will go and doesn’t want to speak too soon OR they already have their own predictions on how bad it will be and simply don’t want to share them with the world. If this is the case, then foreign investors can take this lack of news as very bad news… no news is bad news, in other words

One thing is certain: China’s refusal to release an economic prediction for 2020 is definitely not good news. If they were really feeling confident in where they were in terms of handling the virus, then they would be eager to share that information with the world. Instead, they are essentially dodging the question and trying to change the subject.

Here’s our interpretation of what’s probably going on with China.

How We Can Interpret This

First, here are a few of the things that the Chinese government is doing to help the country rebound. They were cautious of just writing checks to their citizens (as was done in the United States and other countries) and instead have opted for these measures:

➢ The government has decided to cut the cost of Internet this year by 15%

➢ The government will increase its subsidies for basic medical insurance for some residents but only by a little over $4 a year per person

➢ They’re going to stick by their initiative to eradicate rural poverty by the end of the year, which is very reassuring news

➢ They reassured domestic and foreign investors that China is still committed to shifting away from central planning toward a greater reliance on free markets

➢ They reaffirmed China’s commitment to the phase 1 trade agreement with the United States.

Here’s what we think: China is still China. They’re on pace to be the world’s largest economy by 2030 and although the coronavirus is definitely causing them more trouble than they’re letting on, eventually they will rebound. It’s a little bit like a massive steam engine that gets caught in a snowstorm. They might get slowed up a little bit with all of the snow on the tracks but eventually, they will be out of the storm and back to full speed. It’s really just a matter of when they will return to full speed, not if.

The measures listed above (specifically the fact that they emphasized that they will still be trending towards free markets as well as honoring Phase One of the trade deal) are very reassuring. However, just like the lack of transparency they showed when reporting coronavirus stats, China has a history of always putting their best interests first. We wouldn’t be surprised if they said what people wanted to hear at the moment, only to change direction later on.

That being stated, we are still very bullish on the direction the Chinese economy is heading toward. The coronavirus presents a disruptive development that nobody saw coming. However, by 2025-2030, the coronavirus will likely be a distant memory instead of something that still threatens to shut down businesses. It’s also worth mentioning that other countries still have to deal with the virus as well. Particularly, the United States is still struggling to contain the spread of COVID-19. Going forward, this is something that will be present for all countries, not just a China-specific problem.

If you’re an investor who is getting skittish about investing in China, we’d recommend the age-old investing advice to “focus on the long-term”. Don’t think about China’s growth over the next few months. Instead, focus on where they’re (still) projected to be in the next 10 years, which is the world’s #1 economy.

We hope that you found this article valuable when it comes to understanding how China’s economy might fare in the wake of the coronavirus. Please bear in mind that this is just our analysis and should not be taken as hard fact. If you’re interested in reading more, please follow our blog and visit the “New Here?” section of ChinaFund.com for a well-structured perspective on our work.

As such, China’s decision of banning exports when it came to products such as masks was hardly criticized internationally due to a combination between insufficient demand to cause enough ruckus and… well, human nature, understanding that when a country is in dire straits as was the case with China, it makes sense to prioritize internal consumption.

Unfortunately, a supply chain disaster was looming in light of the fact that while China can produce enough masks to satisfy even ultra-increased internal demand in an epidemic situation (please note that the WHO hadn’t issued the pandemic alert at that point in time), the same cannot be said about pretty much any other country.

Why?

Simply because when it came to their supply chains for this particular merchandise, an important variable was… of course, China. Therefore, companies that sold vital equipment in other nations either imported said equipment from China altogether and even if some were capable of setting up production lines, they still relied on China for essential components. Needless to say, the companies in question ultimately found themselves unable to set things in motion in light of the fact that the supply chain equation was too complex as well as China-dependent.

“Fortunately” (for lack of a better term), China managed to bring its crisis under control by the time case growth in other nations became exponential and at that point, China found itself in a bit of a not just humanitarian but also economic predicament: should it continue banning exports so as to beef up its domestic reserves in the perspective of a second wave of infections or should it do the exact opposite and allow companies to ship to now-desperate foreign customers?

Why is this an economic predicament as well?

Simply because the role of an economist revolves around trying to think not one or two but multiple steps ahead. As the dust starts to settle in other nations as well (most likely in a less straightforward manner than in China, unfortunately, in light of the fact that few other countries can “get away with” imposing risk mitigation measures as strict as the Wuhan ones), pretty much all stakeholders will start thinking about what happened in 2020 with a clear head and especially about the lessons which need to be learned.

What does this have to do with China?

Well… everything, sing arguably the number one lesson will most likely be related to the fact that the proverbial West is excessively dependent on imports from China, at least when it comes to items relevant to national security. To put it differently, wealthy Western nations found themselves with record-breaking amounts of relief mitigation funds at their disposal but not enough supplies to spend the money in question on in light of the fact that there was a major bottleneck issue in China.

As such, a potential decision involving initiatives that have to do with moving away from China when it comes to at least essential products would be strategic more so than political… a matter of common sense, at the end of the day, especially after the harsh lessons 2020 has taught the world. Simply put, for strategic national security reasons, there would be tremendous (no Donald Trump pun intended) pressure on companies all over the world to switch to a more sustainable and especially scalable supply chain model, which:

1. Relies more on domestic raw materials, even if they are more expensive
2. Relies more on domestic manufacturing, even if it is more expensive
3. Revolves to a greater degree on scalability, even if it is a more expensive route compared to the ultra-optimization many companies have engaged in to cut costs, an ultra-optimization model which even generated bottleneck issues in China

Needless to say, China finds itself in a very sensitive situation.

To minimize damage, it has no choice but to try and make it clear that even in extreme scenarios such as the 2020 one, China can manage to export enough in terms of volume to satisfy the ever-increasing international demand for medical supplies (in this particular case). With “try” being the operative word because as empirically proven, this endeavor became pretty much impossible.

As such, willing buyers (even at high prices) found themselves realizing that there were shortages for “the best of the best” in terms of equipment (FFP3 standard masks, for example, which were all but impossible to secure in bulk) and even when it came to more common ones (for example KN95 in China, which can be considered an equivalent to N95 and FFP2, although the medical dimension tends to involve a lot of nuances), there were oftentimes unacceptable bottleneck-generated delays involved. More specifically, medical systems from all around the world weren’t anywhere near prepared enough in terms of the very basics such as masks (more specifically respirators) and protective equipment, let us not even mention more advanced products of which there were shortages, most notably ventilators due to the nature of the disease brought about by this particular virus and theories pertaining to ventilator shortages (which, fortunately, did not pan out, at least thus far).

All in all, despite its best efforts, China found itself unable to scale properly and quickly enough in the context of an avalanche in terms of international demand and applying the precautionary principle at home, given the risk of a second wave of infections. To put it differently, China found itself fighting a battle it is impossible to “win” on all fronts logistically and it will take years for the long-term consequences for 2020’s realities/implications to become apparent. As always, the ChinaFund.com team will follow these developments closely and continue putting its expertise at the disposal of both readers and especially clients.

• “China has been growing at an unprecedented rate”
• “The Chinese economy has been growing every year for the past 40 years”
• “China is projected to keep growing and overtake the U.S. as the world’s #1 economy”

While all of these statements are true, it’s important to understand why they’re true. What did China start doing differently that allowed them to grow at such an amazing rate? Through this article, we’ll take a look at some of the reforms that China passed to jump-start their economy as well as bring them to where they stand today.

This is how China achieved their amazing economic growth:

Free Markets and Why They Lead to Growth

One of the first aspects we want to talk about when mentioning China’s growth is the role of free and open markets when it comes to economic growth. It’s been proven historically that open, competitive markets have resulted in the fastest economic growth for countries that implement them. This is the main argument in Yuval Harari’s Sapiens and it could be argued that this transition was the leading factor for China to start growing their economy.

If you’re not familiar, a free market is defined as “an economic system based on supply and demand, with little or no government control. It requires that all decisions made in a given economic environment are voluntary. In other words, it’s an economic system where people make decisions instead of the government. People are free to:

1. Start new businesses based on societal needs
2. Make decisions on what to do with their profits. They can either keep them or invest them back into the business
3. Create their own production goals. If they want to grow, they can produce more or if they just want to sustain, they can maintain current production levels

In addition to an open market, minimum regulation from the government and a population focused on entrepreneurship are two other keys to growing the economy of a country.

Let’s take a closer look at entrepreneurship and how it plays a role in creating economic growth.

Entrepreneurship

If free markets are the car that drives economic growth, then entrepreneurship is the gas that goes in the tank. When an entrepreneur has a new business idea, he fills up the tank and the car of economic growth moves forward.

More often than not, entrepreneurs are responsible for the growing economy of a country. They solve societal problems, create new industries and put the population to work. One important aspect to note is that innovation never stops. Entrepreneurs can (and will) keep coming up with new business ideas that drive a country’s economy forward. For example, some of the United States’ top companies were founded in the past 20 years:

1. Facebook (2004)
2. Uber (2009)
3. Google (1998)
4. Bird (2017 – fastest company to reach a $1 billion valuation)
5. Airbnb (2009)

You can be pretty much certain that there are companies in their seedling stage now that will dominate the world in the next decade or so.

Here are a few more manners in which entrepreneurship spurs economic growth:

➢ Adding jobs to the economy – What’s the easiest way to lower unemployment? Create new and exciting companies that can hire people. One of the best examples of this is the recent creation of the gig economy. The gig economy is described as an economy of short-term freelancers and temporary jobs, we have dedicated an entire article to this topic that can be accessed by clicking HERE. The gig economy just recently came into existence but now allows people to make extra cash in incredibly simple ways. Not only has the gig economy put more people to work but it has also put more spending money in people’s pockets (which further spurs economic growth)

➢ Adding to the national income – Existing companies can sometimes hit a glass ceiling in terms of the amount that they can grow. The larger they become, the longer the decision-making process and the more stifled innovation gets. Start-ups, on the other hand, enter new markets and create new income where there previously was none

➢ Create social change – Due to the fact that entrepreneurs solve societal needs, they effectively improve the overall quality of life for humanity and increase economic freedom

There are clearly plenty of ways through which open markets and a plethora of entrepreneurs can drive economic growth.

So what does this have to do with China?

China Reforms

For the overwhelming majority of China’s history, they’ve been dominated by the state. There was no private enterprise and no entrepreneurship. Every company was more or less owned by the state and the government dictated things like production levels and management decisions. Remember how free markets thrive because people work in their own self-interest? China wasn’t doing that at all.

This all changed, however, when Deng Xiaoping initiated deregulation reforms in 1978 to allow capitalists to thrive in China. Since these reforms were implemented, China’s economy has been on a tear.

The following graphs do a good job of illustrating how quickly the country flipped and have been sourced from an article in Quartz:

Not only did the poverty rate plummet (first graph) but incomes also increased significantly:

One of the most meaningful initiatives Xiaoping proposed was that China should learn from other countries and let their citizens “vie” to get ahead. This type of societal structure will inspire workers with a lower standard of living to work harder and improve their situations. When this happens, society will be better off as a whole.

This is essentially the crux of laissez-faire economics implemented in the United States and other free-market countries. The United States, in particular, is known for their “American Dream” mentality. This is a mentality that anyone can become rich and successful, regardless of who they are and where they come from.

Individuals are inspired to work harder to improve their own lives instead of working hard to please the government. Additionally, the ability to work harder and earn more money means that people will have more money to spend on products/services provided by businesses, which means more money for the business owner and this creates a self-sustaining cycle.

We want it to be clear that China is still a communist country*. The state still dominates the country and gets the last say in all businesses. They just tweaked their laws so that people were allowed to create their own businesses.

So if these reforms happened in 1978 and have obviously been quite successful, where does that put China at today?

China Today

As mentioned previously, China’s economy has been on a tear and they are on the brink of overtaking the United States as the world’s largest economy. According to WorldBank data:

1. China’s GDP currently sits at $13.6 trillion
2. Annual GDP growth is projected at 6.9%
3. Their population sits at 1.4 billion
4. The average life expectancy has been steadily increasing and is now at 76

Although China’s growth has been amazing over the past couple of decades, nothing is certain. There are still a few factors that could change China’s projections. For example, continued escalation of the trade war between the United States and China could pit these two countries against each other even more.

Additionally, a change in ideology in leadership or within the Chinese population could also derail the country’s direction. For example, due to the coronavirus pandemic, the current generation is at risk of having a less easy life than older generations. This could lead to generational unrest and a search for an alternative to socialism with Chinese characteristics.

Speaking of the coronavirus, this is the final question mark for the future of China. This is true for most countries but especially China because ground zero for the COVID-19 virus is in Wuhan, China. The virus has crippled the economy during the first half of 2020, causing the first GDP contraction in 40 years and thrusting untold numbers into unemployment.

It can be difficult to tell how the county is handling the pandemic because China’s reports have been questionable. However, the future of the country will be determined by how they deal with the virus and how quickly they can return to business as usual. The same is true for most nations.

We hope that you’ve found this article valuable when it comes to understanding a little bit about how China achieved their amazing economic growth. If you’re interested in reading more related to China, keep an eye out for new blog posts or go through our existing ones. And, of course, do not hesitate to reach out if there is anything our team of experts can be of assistance with.

In this article, we’ll take a look at:

● Dealing with the Chinese government
● Chinese business practices
● Cultural expectations

Here is our list of important things to know before doing business in China:

Government Intervention

In the United States, the government and private enterprises are kept pretty separate from each other (and that’s the way that people like it). Obviously, there are still regulatory bodies (the Internal Revenue Service, the Securities and Exchange Commission and the Federal Trade Commission to name a few) as well as different licenses or permits you’ll need to acquire as a business owner.

In this sense, businesses operate independently from the government but still need to play by the rules that the government sets.

On the other hand, in China, the government and the private business sector are essentially one and the same. There is quite a bit of overlap between the two and the government has a lot more power over what private businesses can or can’t do. This means that if you plan on doing business in China, you can expect to be doing business with the government as well.

Here are a few manners in which the government encroaches on private enterprise in China, a situation that is remarkably different compared to the United States:

➢ Putting government officials on the board at companies – This initiative was recently announced and was “sold” as an effort to transform the country’s economy to catch up to rivals in high-value industries such as robotics and aerospace. Government officials will be placed on the boards of Alibaba, Greely Holdings and Wahaha but a full list was not disclosed. Although the primary claim was that this move was purely for economic innovation, it does raise security concerns. That’s because Chinese companies are required by law to hand over data that the government requests

➢ Accessing proprietary files – The Chinese government is legally allowed to request data from companies (and companies are obligated to provide it). This is one of the main reasons why there is such a backlash against microchip company Huawei and the 5G network. Other countries are concerned that if Huawei gets access to a global 5G network, it will hand over personal data of other countries’ citizens to the Chinese government

➢ Requesting that private companies do favors for the government – Although you are starting to see more of this in the United States (with Donald Trump’s attacks at Twitter and Facebook), it is much more commonplace in China. Companies in China are required by law to follow government orders. The same expectations exist for American companies doing business in China and it’s one of the reasons why so few companies have entered the market (especially in the technology industry). For example, a company such as Netflix would be in a bind if the Chinese government suddenly demanded that they hand over information on their viewers, because their customers in the United States wouldn’t like this very much

The main takeaway from this is that if you’re planning on doing business in China, expect the government to be holding your hand along every step. If you were to refuse to comply with a governmental order, it would have widespread consequences and wouldn’t be easily resolved in a court setting.

This is especially true if you’re a businessperson from the United States.

Common Business Practices

For the most part, every different country is going to have slightly different business practices. Even different states within the United States have slightly different business practices and expectations. That being mentioned, you’ll want to make sure that you have a good idea of what the expectations will be from you before walking into a meeting with Chinese businessmen. Let’s take a look at what some of the most common business practices are in China:

➢ Business mentality – When you show up for a meeting, the Chinese will expect you to be fully prepared. When it’s time for business, it’s time for business. This means having an adequate number of copies of your report ready to hand out. It’s generally safer to have the report in black and white, as opposed to color. On the other hand, when meetings are broken and you’re at dinner, it’s considered rude to keep discussing business. Another thing to note is that China places a big emphasis on hierarchical order. This means that the first person of a group to enter a room is considered the most important. They will expect that the same is true of your group

➢ Relationships – Relationships play a critical part in Chinese business and are a major part of building trust (more on that in a moment). The Chinese prefer to do business with people whom they have a favorable relationship with and more often than not, this can represent the difference between winning business or falling short. Because of the need to build a strong relationship, deals and negotiations can take longer to materialize and close

➢ Trust – Trust is one of the building blocks of a successful business relationship. Trust is acquired in many ways. Doing the proper research beforehand, always being polite, and showing that you’ve made an effort to adapt to their culture are all ways to earn trust. Surprisingly, another good way to earn trust is to engage with drinks over dinner (while also avoiding talking business). Drinking is a big part of Chinese culture and it’s considered rude to deny a drink

➢ Indifference towards deadlines – When doing business with the Chinese, expect deadlines to come and go with little fanfare. In the United States, there is a strict emphasis on deadlines and people scramble to get projects or deals closed by a predetermined time. This attitude is not reflected by the Chinese. In fact, it can be considered pushy and rude to force deadlines in China. This is mainly due to the need to build a trusting relationship before putting pen to paper. Don’t put too much weight on specific deadlines and factor this into your own personal plans

➢ Business attire – When in doubt, it’s better to dress conservatively. Wearing neutral colors and a traditional suit is always a safer option over something flashy. Wearing flashy attire can be seen as an attempt to belittle or brag

These are just a few of the more common business practices in China. If you’re interested in reading a more complete list, click here. Don’t worry about memorizing every little detail, sometimes just making an effort is all that matters. You just want to make sure you’re not insulting the other party without realizing it.

Now let’s take a look at what some of the cultural expectations are in China as a whole:

Cultural Expectations

Cultural expectations are a little bit different from common business practices. For example, knowing to show up prepared to business meetings so as to not waste time is a business practice. Knowing that small talk is an important part of doing business is a cultural expectation.

Having a firm grasp on the cultural expectations of doing business in China will not only help make you a successful businessperson, but it will also help make you popular in China in general! It’s important to be aware that what is acceptable and commonplace in the United States might be considered rude in China.

Let’s a take a look at some of the more pressing cultural expectations:

➢ Small talk – Small talk is considered an important part of the relationship-building process (see section #2). Launching right into a business conversation can be considered hasty and rude. It would also be a good idea to learn a few Chinese phrases for the small talk (this type of gesture is always appreciated)

➢ Handshakes – Handshakes are common in China but it’s always smart to let the other party initiate the shake

➢ Negative answers – A firm, negative answer (even a simple “no”) can be considered rude. It’s always better to try and frame answers as positively as possible, even when the answer is a simple no. For example, instead of “no” you might say “I’ll think about it”, “maybe”, or “we’ll see”

➢ Body language – It’s always best to appear calm and professional. Using too much emotion during the meeting can negatively impact your business relationship

➢ Do not bring gifts – Although this seems like a polite and innocent gesture in general when doing business, it can seem as though you’re trying to offer them a bribe (which is illegal). Offering a gift can make them uncomfortable and question your morals

Again, these are just a few of the cultural expectations that should be expected when doing business in China. Depending on the scope of your business, we’d recommend doing a little more research before the meeting. Additionally, just like most things, practice will make perfect. The more meetings you take part in, the easier it will be for you to remember certain things.

We hope that you’ve found this article valuable when it comes to understanding what to know before doing business in China. If you’re interested in reading more, please visit our New Here section and for more personalized tips, our team of consultants is at your disposal.

That being stated, there are quite a few other reasons to start investing in China other than their growth rate. Whether you’re looking to open up a physical business or invest some money in Chinese companies, there are a lot of reasons to get started. Let’s take a look at a few of them.

5. Population Size

Right alongside their economic growth, China has had an explosion in population size. China currently has the world’s largest population, sitting at 1.4 billion people. India is close behind with 1.3 billion and the United States in third with 330 million. This means that despite being roughly the same size in terms of land, China’s population is roughly 3 times the size of the U.S. population.

If you’re an outside investor, this is good for a few reasons.

1. Customer base – If you’re planning on opening your own business in China, there is no shortage of potential customers to buy your product. If you’re investing in a Chinese company, the same logic applies
2. Labor – China has plenty of people available to help with production. This is one of the reasons why so many companies are opening up factories in China

Most investors will look at an opportunity for growth within a given industry or country over a longer period of time. The sheer size of China’s population means that it should grow across the board in terms of different industry sectors. For every one student that America has right now, China has 3, all of whom will grow up and contribute to the economy.

NOTE: Population size isn’t really meant to be a competition between countries. However, it can still play an important factor when making decisions and we have dedicated an entire article to explaining why.

4. Diversification

There is always a significant emphasis on diversifying when investing. You want to spread your money across different asset classes to make sure that you are protected. For example, if you put all of your money into one stock and that stock performs poorly, then you’re at risk of losing all of your money. However, if you spread your money out over 30 different stocks then you’ll be protected if one stock performs poorly because the other 29 might perform better.

Two concepts worth keeping in mind:

Diversifiable risk – This is risk that can be controlled by making sure your investments are adequately diversified

Non-diversifiable risk – This is risk from things that are outside of the investor’s control (like a war or a famine)

When it comes to your personal portfolio, your diversifiable risk can be reduced by investing in foreign countries and foreign currencies. Non-diversifiable risk would be something like Donald Trump’s trade war with China, which individual investors have no control over. The key is to minimize your diversifiable risk as much as possible.

So what does this have to do with investing in China?

Well, by investing in China you’ll be further diversifying your portfolio by having investments in a different country and exposure to a different currency. This means that if something terrible were to happen in the U.S. or with U.S. stock exchanges, then you’ll still have some money safely invested in another country.

By investing in a different currency (the renminbi), you’ll also be able to take advantage of potential fluctuations in currency values. For example, say that the Chinese currency experiences a positive trend in the currency appreciation market. If this happens, then the Chinese currency will be stronger during an inflationary cycle in comparison to the dollar and can offer better chances of survival to an investor investing in this market.

3. It’s Becoming More Mainstream

China has been viewed historically as the boogeyman over in the United States. Some investors are hesitant to invest money because they either see China as a direct threat to U.S. dominance or do not trust the communist government. However, in recent years, investing in China has become more and more popular. As that happens, there will be more transparency between Chinese companies and American companies.

Unfortunately, there have still been a few present-day instances of Chinese companies not being fully transparent. The most recent example happened with Luckin Coffee. Earlier this year, Luckin Coffee admitted that a good portion of their 2019 sales were fabricated through their online app. They artificially boosted sales through their mobile app to make it look as though they were more profitable than they were. When it came out that the sales were made up, the stock collapsed by about 75% before being halted on April 6th, 2020.

Situations such as this one are what make U.S. investors tentative to buy shares in foreign companies. Luckily, stories like these are becoming rarer and rarer. As investing in Chinese companies becomes more and more mainstream, there will undoubtedly be a more robust call for transparency from these companies. A move towards transparency will be better for everyone involved.

2. Government Incentives

China has long been known for the overarching reach of their government. It is not uncommon for the government to put officials on the boards of public companies or force companies to make decisions that are in the best interest of the country. Generally speaking, government intervention and entrepreneurship don’t go hand in hand. However, China actually has quite a few incentives to encourage people to open up new businesses.

If you’re a foreign investor, you might be well poised to take advantage of some of these incentives.

Here are a few:

• If you have a company or project that is focused on technology development, conservation of the environment, energy conservation or the discovery of new energy types, then you are likely to receive different types of tax incentives
• If you reinvest your profits in China, you’re likely to receive tax deductions
• Certain industries are exempt from paying business taxes. For example technology transfer, technology development and related services won’t need to pay as much in taxes
• Taxes on income earned by foreign enterprises though gains on stocks, interest, retirement pay, online work, and capital gains have recently been reduced from 20% to 10%
• To encourage small businesses and startups, the tax rate for small-sized businesses and new technology companies is just 20% instead of the standard 25%

Although some of these incentives don’t seem like the biggest deal breaker when it comes to starting a business, the fact that they were all implemented fairly recently is a good sign. Hopefully, due to their past success, China will continue to implement incentives for new entrepreneurs.

1. China Is Getting Back to Work

It wouldn’t be right if we ended this entire article without mentioning the coronavirus. As you have most likely heard, the coronavirus began in Wuhan, China and promptly raced through the population before going out into the rest of the world. However, at the time that this was written, it appears as though China has a good handle on the virus outbreak:

There are two things that come to mind when looking at this graph.

1. China may not be disclosing all of their data about the virus. There is a WSJ article which argues something similar. Just by looking at the graph, it’s suspicious to have such a spike and dip so quickly for something like cases in a pandemic
2. China did a particularly effective job of handling the virus outbreak

Most reports that have come out seem to point out that the truth is somewhere in the middle. Since China is a communist country, the government has much more power to enforce stay-at-home orders. Compare this to the U.S., where quarantine orders were treated as a suggestion until businesses were actually forced to close.

However, it does appear as though China is getting back to work. Following those strict quarantine measures, the coronavirus appears to be more or less contained in China. Most of their larger companies and around two-thirds of its small- to medium-size companies have gone back to work (according to China’s Ministry of Industry and Information Technology). It’s also a very good sign that the quarantine has been lifted in Wuhan (the place responsible for the outbreak in the first place).

The quick return to work will be good for China’s domestic economy and for local consumer confidence. The quicker the spread of the virus can be curbed, the sooner everyone can return to work. The U.S., on the other hand, recently reported a record-breaking number of new cases.

We hope that you’ve found this article valuable when it comes to understanding a few reasons to invest in China besides their amazing growth. To read more, we would strongly recommend visiting our “New Here” section and to get in touch with our team of experts for consulting-related requests, our Contact section can be used.

Isn’t it selfish to talk about economic numbers when people are dying?

No, it is the exact opposite due to the fact that economic calamities can, as peculiar as it may seem, lead to an even greater number of long-term deaths than pandemics if things are not kept under control.

As a bit of an extreme example, let us refer to a random country (Country A) that is affected by a pandemic, just like its neighbors. To combat the pandemic in question, the entire country enters a long-term lockdown period, with economic activity essentially grinding to a halt and fortunately, the medical issue eventually becomes a thing of the past.

Does this mean Country A is safe?

From the virus in question, yes.

From the economic ramifications, no.

It is vital to understand that we live in an over-leveraged paradigm, where recessions can prove to be nothing short of deadly. To understand this, please try to remember how devastating the effects of the Great Recession risked becoming and then, try an experiment: locate a chart which depicts the evolution of let’s say the United States Gross Domestic Product over a period of many years. You will notice on the chart in question that the Great Recession seems anything but “great” and on the contrary, it looks more like short-term noise on the chart in question.

An interesting preliminary conclusion arises: even a less than Earth-shattering recession can be enough to risk bringing the global financial system to its knees. From financial industry companies (commercial banks, investment banks, insurance companies, etc.) to even auto industry ones, “systemically relevant” entities had to be bailed out via unprecedented measures so as to save the financial system status quo after, again, a recessionary environment which now seems to be a mere blip on the radar.

Fast-forward to the present, and a common sense question comes to mind: in light of how devastating the effects of even a moderate recession can be, shouldn’t decision-makers also pay enormous attention to the economic ramifications of the pandemic?

Make no mistake: in China and elsewhere, the social ramifications of economic miscalculations can be more devastating than that of a pandemic in a “perfect storm” situation. From deteriorating economic conditions that lead to local unrest in vulnerable countries and end up causing anything from violent revolutions to a long-term economic depression, with its many consequences that can/should also be expressed in lost lives… to, yes, even World Wars, it is humbling when you think about how many of the greatest disasters of humanity can be traced back to economics.

Does it mean aggressive containment measures are unwarranted?

Of course not… as long as they are science-based and take advantage of everything 2020 has to offer in terms of technology, with South Korea representing a textbook example to that effect.

As the Covid-19 situation made clear, that is unfortunately not always the case. Instead, what oftentimes tends to happen is that everyone (from mainstream as well as alternative media outlets to politicians) is too afraid to state something that goes against the “time to panic!” narrative for fear of public ridicule and as such, ends up more or less voluntarily playing the fear mongering game. A fear mongering game which revolves around the idea that no measure is too aggressive, an idea powerfully emotional rather than rational and if there is anything readers have learned from ChinaFund.com, it’s that reason needs to always prevail because if not, disaster is usually right around the corner.

Again, the scientific method needs to prevail.

In a volatile environment such as the one we find ourselves in, making sure our message has been properly understood is paramount.

Which is why we want to make it perfectly clear that:

1. We believe in disaster preparedness, anything from economic preparedness for the average citizen to nation-wide preparedness
2. We do not think pandemics should be underestimated in light of the exponentially-growing threat they can represent if improperly tackled
3. We believe that yes, decisive action is required to tackle pandemics

… but only as long as the measures that are employed remain firmly in the realm of reason. To put it differently, only as long as the measures in question are taken because they represent a sound science-backed approach rather than an effort to appease an overly-alarmed general public because the latter can lead to unintended consequences that are difficult to the point of impossible to quantify, consequences that might end up being exponentially greater in the long run than the consequences associated with the initial crisis itself.

We realize that our opinion isn’t exactly popular (in light of the fact that we point out that even too much of a good thing, for example shutting down economies indefinitely rather than embracing the South Korean model) but at the end of the day, economic thinkers owe it to their public to voice their honest opinions, even if it means going against the flow. And in our opinion, from the average individual who is too busy panicking to see things clearly to political decision-makers, pretty much all stakeholders in this immensely complex equation are greatly underestimating the economic (which leads to social) consequences of policies that are emotion-driven rather than backed by a meaningful understanding of the scientific method.

The ChinaFund.com team will keep monitoring the manner in which things develop worldwide as well as in China, in an effort to put forth a balanced perspective on an extremely delicate topic, a perspective backed by rational rather than excessively emotional arguments. At the end of the day, it is the duty of any self-respecting economic thinker NOT to give the public what it (thinks it) wants but rather what the thinker in question genuinely believes the public needs.

And in our view, may countries are making the mistake of not utilizing enough in the way of scientific method and technology-backed approaches due to anything from bureaucratic red tape (the European Union’s ridiculously excessive privacy protection policies) to election-related rigidity (Donald Trump refusing to wear a mask, for example), which is… once again in our opinion, just plain wrong.

Before continuing, it is worth pointing out yet again that to be a successful investor/trader in general and when it comes to Chinese assets in particular, analyzing the asset(s) you have in mind in a brutally objective manner is a must. Many readers undoubtedly came to ChinaFund.com expecting a “perma-bull” narrative or in other words, expecting us to be yet another Chinese-oriented team of experts that believes prices can only go up, China is the future and everything else will collapse… that is hardly the case.

Is this because we believe prices won’t go up?

No. We are definitely long-term bullish but this doesn’t mean we see the world around us through rose-colored glasses, as that is a surefire way of losing money. Instead, while we do believe that the future will ultimately be bright for pretty much any desirable and meaningfully investment grade (!) Chinese asset, we also accept the fact that there will be anything from occasional bumps to depressing bear markets we will have to deal with along the way and there is ultimately absolutely nothing wrong with that. There is however more than just “something” wrong with assuming that just because you are long-term bullish, this automatically means prices cannot possibly go down in the short to mid-term.

Is this because we believe China doesn’t have a bright future?

Once again, no. As explained rather obsessively here at ChinaFund.com, we believe a future in which China becomes more and more dominant is pretty much inevitable in the absence of Earth-shattering developments, the forces at play are simply too great for us to be pessimistic with respect to China’s big picture future. But short-term, make no mistake, there has been pain and there can be pain in the future as well.

Our team’s problem with the “organic growth” narrative revolves around the fact that it tends to be used in a let’s call it cheerleading manner, with die-hard optimists believing that only upswings are “natural” or “organic” and that whenever prices go down, an evil manipulator or another third party needs to be blamed.

When it comes to Chinese assets, conspiracies revolving around the West that is trying to curb China’s growth whatever it takes abound. Ironically enough, the same principle tends to be valid with respect to Western assets, with China being the “usual suspect” whenever perma-bulls are looking for someone to blame for less than stellar price action.

No matter what the context may be, the party using terms such as “organic” is pretty much always trying to be manipulative in one way or another by framing the narrative in a way which makes it seem that any price action that goes against the core beliefs of the party in question is somehow unnatural… with, of course, it being only a matter of time until things get back on track.

By embracing such an attitude (yes, even when investing in Chinese assets), we firmly believe that you are shooting yourself in the foot as an investor. Instead, we would strongly recommend leaving emotion out of the equation completely, no matter how much you appreciate the asset you own. At the end of the day, as pretty much any investor or trader worth his salt can confirm, falling in love with a position is never a good idea and on the contrary, such love stories usually end in tears.

As emotionally numbing as it may be (and yes, you have to accept the “emotionally numbing” dimension of trading and investing if you are serious about longevity), brutal decisions need to be made when the time is right. If your model indicates that it is time to sell one of your favorite assets, you pull the trigger or “worse” yet, why not even short-sell when the right conditions present themselves? The same way, if you see opportunities that your model indicates are asymmetrically in your favor but they are associated with an asset or asset class you aren’t necessarily ideologically aligned with, a good investor/trader will once again tell you that pulling the trigger makes perfect sense.

Think of it as brutally rational trading and/or investing, it is most definitely a metaphor that rather accurately describes the manner in which the ChinaFund.com team sees Chinese assets. Whenever we need to make an investment decision, we do our best to put our bias behind us and instead, do what the numbers/models dictate.

The same way, “brutal honesty” is the name of the game when working with clients as well. If you were looking for a team of “yes men” consultants, we can assure you it is most definitely not us. Our team does not hesitate to share painful truths/information with clients because we know that something which perhaps rubs you the wrong way now but is in your best interest will ultimately consolidate the relationship we are trying to build.

As such, you will never see us push terminology such as “organic growth” and generally speaking, for a team that even has the word “China” included in its domain, you will notice that we are the exact opposite of “cheerleader” advisors. Therefore, do not be shocked when we tell you that for example short-selling opportunities might emerge when it comes to one of your favorite assets and please know that we are only embracing the “brutal honesty” mantra because it is in your best long-term interest. To find out more about what we can do for you, our Consulting section is at your disposal or, of course, you can use the Contact section of ChinaFund.com to send us a message with what you have in mind.

If you’ve glanced at any of our other blog posts, you know that the Chinese economy is growing rapidly. This means that companies who already have a strong presence in China are poised to take part in this growth as well. As an investor, knowing which companies are already dominating the Chinese business-scape could give you a leg up.

This is our list of U.S. companies with a large presence in China.

Nike

Nike has an interesting relationship with China. They’re currently the leading manufacturer of sportswear in China, followed in market share by Chinese company Li Ning and then Adidas. Last year, Nike brought in $6.2 billion in revenue from the Greater China region which was an increase of 21% from the previous year (compare this with just 7% growth in North America). Mark Parker (Nike’s CEO) has been particularly vocal about his excitement for their growth in China.

Nike has also boasted 17 consecutive quarters of double-digit revenue growth in the Greater China region.

Nike Basketball has been growing in popularity in China recently as well. However, they found themselves caught in between a controversy surrounding the NBA and China. The drama started after Houston Rockets GM Daryl Morey tweeted his support for the pro-democracy protestors in Hong Kong. Nike has largely kept silent on the matter so as not to draw the ire of the Chinse government.

Nike recently surprised investors by largely dodging the pain that coronavirus brought onto other businesses in China.

Apple

Apple shines in China’s tablet market. According to consulting firm iResearch for example, Apple’s iPad has a market share of 51%, followed by Lenovo and Samsung with 13.8% and 9.8%, respectively. Additionally, Apple currently sits at 4th in the country in the smartphone market in terms of market share. However, they have effectively no presence in China’s operating system market.

Apple’s larger tie to China is its supply chain, which is located primarily in China. This means that Apply relies heavily on China to create and ship its products. Despite being one of the few American technology companies to enter the Chinese market, Apple’s relationship with China has had a rough going recently.

First, there was Donald Trump’s trade war which threatened to impose tariffs on Apple products, force them to raise prices and potentially disrupt their supply line. Now, like most other companies, Apple is fighting the economic shutdowns triggered by the coronavirus. It’s never good news when the country you rely on to create most of your products becomes the epicenter of a global pandemic.

Coca-Cola

Sprite (owned by Coca-Cola) is the number one soft drink in China, with a 26.9% market share. In total, Coca-Cola holds a 61.5% share of the Chinese soft drink market, followed by Pepsi. Right now, Coca-Cola has more than 40 factories in China, and they are planning to invest another $4 billion in plants and delivery trucks over the next few years (according to Bloomberg).

In most of the country, water is not free at restaurants. Many people figure that if you have to pay for a drink anyway, you might as well pay for a soda.

Coca-Cola clearly sees China as a huge opportunity and is creating the infrastructure needed to take full advantage of what this market has to offer.

Walmart

According to Statista, in January 2020, there were 438 Walmart stores in China spread over 180 cities. Walmart’s net sales in China amounted to just over $10 billion for that fiscal year. One important aspect to note is that when Walmart entered the Chinese market, they formed a strategic partnership with JD.com (China’s second-largest eCommerce retailer). This has allowed Walmart to bolster their online sales in China. It goes without saying that this partnership with JD.com paid untold dividends during the recent pandemic and the following quarantine. In China, stay at home orders were much more strongly enforced than in the United States. People were solely reliant on eCommerce to get their products.

In the upcoming year (2021), Walmart is expected to open 250 new stores internationally. Most of these will be located either in Central America or in China.

Boeing

According to Forbes, Boeing is currently sitting at a 50% share of the Chinese commercial aircraft market. It’s safe to state that, right now, Boeing’s business is definitely struggling due to the coronavirus and their issues involving the 737 Max. Boeing was hit harder than most companies by the coronavirus because all flights were essentially grounded. People were strongly encouraged not to travel at all and international borders have been closed. If people aren’t flying, then businesses aren’t buying new planes.

That being made clear, they’re still Boeing (meaning that they’re the world’s largest aerospace company and do about $80 billion in revenue). In a longer-term context, they expect the aviation market in China to more than triple over the next 20 years, which will require an additional 5,000 planes (valued at $600 billion in revenue).

Boeing and China have a mutually symbiotic relationship. By that, we mean that they’re each other’s top customers. According to Boeing-China President David Wang, speaking to CNC World, “China is already Boeing’s biggest customer outside of the United States and Boeing is the largest purchaser of made-in-China aviation parts and components.”

General Motors

Despite all of the hype surrounding Tesla’s stock price, General Motors is still one of the dominant players in the global auto market (4th in terms of global sales). They’re also the top-selling brand in China and are looking to expand in the country.

GM is slowly becoming a veteran in China. They sold more vehicles in China than in the U.S. for the first time ever back in 2010. At that time, China accounted for a quarter of the company’s global sales. GM is also able to operate efficiently in China because they formed a number of joint ventures (including a particularly successful one with SAIC Motor).

Additionally, GM saw double-digit year-over-year growth in China in April 2020, despite being set back by the coronavirus. To help combat the virus, GM gave away free masks at their locations and hired prominent social media influencers to help promote their new models.

Microsoft

Of all the companies on this list, Microsoft probably has the bleakest relationship with China. This is because it’s very difficult for technology companies to break into Chinese markets (Apple is the exception that proves the rule). This is because of two reasons:

1. China has very different laws when it comes to digital privacy compared to the U.S. and therefore, the Chinese government has different expectations as to how a company like Microsoft will act when it comes to disclosing user data to the government. Microsoft has to make a stand to protect their consumers or else they will risk losing their United States consumer base, with the obvious implications this brings about
2. There has been a history of Microsoft products being ripped off in China. Brad Smith, the current president of Microsoft, even went as far as to say, “It’s not hard to find Microsoft software in China and even in Chinese government institutions. It’s a lot harder to find Microsoft software that Microsoft has been paid for.” Industry insiders believe that growing tensions from the trade war could be leading to a “tech cold war” between the two countries (according to Geekwire)

Microsoft dominates the PC operating systems market in China but only sees a fraction of the revenue that they should. Despite the massive sales that they do in China, the country only makes up 1.8% of Microsoft’s revenue.

KFC

KFC (owned by Yum Brands) is the most popular fast-food restaurant in China. They currently have 5,000 restaurants sitting in 1,100 cities in China and hold 11.6% of the market share (compared to McDonald’s, which has 5.6%). KFC is another company that isn’t new to China, as they were the first American fast-food chain to enter the country in 1987.

Due to its popularity, the company plans to increase the number of restaurants in China to 20,000. According to a study done in the Harvard Business Review, KFC’s success in China is mainly a function of their success in adapting the restaurant experience to fit Chinese culture. This involves doing things such as:

● Offering a traditional Chinese-style breakfast
● Hiring Chinese managers who speak as well as also read and write in English to help bridge the gap
● Training employees in a manner that’s attractive to Chinese culture (even if it deviates from Western standards)

Starbucks

Starbucks opens a new store in China every 15 hours and is currently the world’s largest coffee chain by sales. In China, the company has a nearly 70% market share and 3,000 stores across 136 cities. They also have over 600 locations in just Shanghai alone. Starbucks announced a same-store sales growth of 8% in China compared to just a 2 percent growth of global stores. Starbucks CEO Kevin Johnson has gone on record saying that, “If you look at the growing middle class in China and the opportunity for more and more people to frequent Starbucks, we can build stores in China for decades and still have runway to build more.”

China is also located just north of the world’s second-largest exporter of coffee beans, Vietnam. Vietnam produces a whopping 1,650,000 metric tons of coffee each year. If Starbucks needs extra coffee beans to fuel their growth, they won’t have to travel very far.

It’s also worth noting that another major Chinese coffee brand Luckin Coffee has recently come under fire for forging the majority of their sales. The scandal involved fabricating online order numbers. With China’s next largest coffee rival now out of commission, Starbucks is in a good position to pick up the slack.

We hope that you’ve found this article valuable when it comes to understanding which US companies have a large presence in China. Should you be interested in learning more so as to (unlike the overwhelming majority of market participants) actually “get” China in a meaningful manner, we would strongly recommend visiting our New Here section or, to take things to the next level, let our team of consultants help you and/or your organization.