When making decisions, a lot of investors like to take a long-term approach to choosing where to put their money. Instead of thinking about where a company’s stock will be over the next few weeks or months, they think about where that company will be 5, 10 or even 20 years from now. This type of thinking has a track record of success and even Warren Buffett has been famous for his quote:
“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:
- 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
- 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:
- Government aid – There may need to be more aid in the form of bailouts or increased unemployment benefits, as explained through another article
- 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:
- 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
- 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.