Articles

A China Update

| By Richard M. Birch III

It is becoming increasingly clear that as the world has begun to reopen, China continues to show little intention to re-opening its borders any time soon. Even the most senior executives are hampered in obtaining travel visas and foreign leader visits are largely being halted.

It is no surprise that the COVID-19 outbreak has witnessed unprecedented supply chain issues affecting the world over with many of those emanating from the disruptions to the Chinese ports that ship so many of the goods the world relies on. 

Some experts believe that in addition to the short-term supply disruptions and foreign travel restrictions, COVID-19 will have single-handedly changed the trading relationship between China and the West forever. 

Suppliers, Regulations, and Investments

Many companies look elsewhere for suppliers, in addition to the wariness of an expectation that the Chinese government will continue to increase its internal crackdowns and global reach. As a result, more and more investment managers are questioning the reliability of investments within a China that is becoming more hostile towards companies within its own borders, as well as showing an increasing hostility to those outside. 

It certainly does not bode well that China’s leader Xi Jinping received some of his loudest ovations at the 100th anniversary celebration of the communist party, this past July, after using threatening language towards any nation that attempt to bully China.

Some weaker than usual economic data coming out of China as of late, and a decline in its equity markets at a rate not witnessed in over a decade, may be a precursor to further volatility and downturns in the Chinese equity markets. The most recent downturn is in direct response to domestic policy curtailing businesses. 

Mainly, it was in response to a slew of new regulations aimed at China’s technology and private education sectors, as the state authorities take further measures to bring about their version of internal stability. This isn’t to say China is not sensitive to the impact of its policies on markets and outside investors. 

Vice Premiere Lui He and other representatives from China’s Security Regulatory Commission were actively reaching out to investment banks during the recent downturn in equities in an effort to calm those markets. Regardless of the market calming measure, it is clear that the volatility for investors in China is at a level not seen in decades and extreme caution should be observed. It is doubtful that the party leaders will roll back their policies to lessen the impacts on the equity markets. 

Stability and Order 

For China observers, none of this should come as a surprise. China Premiere Xi has long argued that optimal economic development cannot occur without stability and order in its goal to control everything related to its citizen’s lives.

Of course, COVID-19 does represent a larger pivot away from China. What does this mean for future inflation concerns when much of the West has relied on China as the “Workshop of the World” to provide cheap consumer goods for so long?  Clearly, Americans have long grown accustomed to purchasing goods at near cost to boost their own standard of living without raiding their bank accounts. 

Might they pivot away from China to other suppliers, resulting in costs increasing for those same goods, and also change the spending habits of westerners?  

The counterpoint to this, of course, is the end result could be a stronger domestic economy that repatriates more of these jobs back to the U.S., and offer better opportunities to workers than the service industry currently does—though there is always the possibility that those jobs simply move to another country as well.  

What all of these scenarios have in common is that investments within China should come with an even higher degree of risk potential down the road should any of these possibilities come to fruition.

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