China: Down and Out? Not so fast…

Introduction

I set off on my recent visit to China with a blend of trepidation and intrigue shaped by advice of caution from other travellers and influenced by the perspectives created in business media. As a shareholder in our family business, I needed to meet with our Chinese suppliers and visit their factories – years of Covid had prevented us from meeting in person. I also wanted to engage widely with people from different classes of society and gain insights from China-based investment managers. Having last visited Shanghai and Hong Kong in 2018, I was keen to witness the changes that six years had wrought and to get a better sense of the current “lay of the land”.

Getting around

From the visa control at Pudong airport to our hotel, the reception in China was welcoming and polite from the start and throughout our stay. Navigating Shanghai and the surrounding districts is easy. I found that my Apple phone worked perfectly with an e-sim and I was able to use Outlook, WhatsApp, Apple and Google Maps, Gmail etc. - practically a seamless transition. The Alipay app proved immensely valuable, also for booking taxis, alongside the WeChat app which Chinese use for communication. It is notable that the embedded DiDi ridehailing app supports regulated taxi’s as well as private drivers – so no conflict there unlike with ridehailing services in the West. The Chinese espouse harmonious competition, not just in ridehailing. More than three quarters of vehicles on the road are electric or hybrid-electric – you can identify them by the green hue on the registration plate. Notably, green cars get preference over internal combustion engines when it comes to registration. You could end up waiting months, even a year, to register your diesel car. If China’s urban electrification is indicative of the future, I would be a long-term investor in copper.

We used Shanghai as our base since many of the businesses were headquartered there. However, we elected to stay in a hotel in Nanxiang on the outskirts of Shanghai. Nanxiang is very accessible and close to fast train stations and a regional airport. It is not “touristy”, catering rather to the working middle- and affluent-classes. We did not encounter other Westerners there and this made it all the more authentic. Nanxiang is busy being both residential and industrial but it’s also attractive with the Ancient Town and the Guyi Garden close by to where we stayed. People were intrigued by us but not so much that it felt uncomfortable or intrusive. Our visits to the (very clean and welcoming) industrial cities of Wenzhou in the south and Yancheng in the north were accomplished by fast train which is the default mode of travel for distances between 200km and 600km. The efficiency of it all combined with personal safety wherever we travelled blew our minds!

Chinese society and the economy

My visit was set against a backdrop of geopolitical tensions, economic challenges, and societal transformations. From concerns about China's “closed economy” and “repressive government” to the after-effects of COVID-19, the bursting of a debt-driven property bubble and an open rivalry with the USA, there were no shortage of issues to consider.

Contrary to the warnings of a closed economy, we found a different reality. Businesspeople were not only open but eager to engage with foreigners. Despite the after-effects of lockdowns, the property bubble and interventionist regulations we found a surprisingly high degree of resilience and determination to “make it work”. The stereotypes dissolved as we delved into discussions with businessmen and -women and ordinary citizens. Businesswomen are as fiercely competitive as their male counterparts and, in many instances, visibly more successful. ?Women tend to drive discretionary spending decisions. China, for most, is an equal society of the sexes but it is not equal in terms of classes. The drive and competition to “get ahead” is tangible - “996” refers to working/studying/practicing 9am to 9pm 6 days a week. One gets the clear impression that the “common prosperity” agenda of government hinges on every Chinese working hard with discipline and self-respect (“Mianzi”) and competing harmoniously - there is no such thing as a free lunch. There is a strong sense of nationalism but it is not coupled with open disdain for foreign interests.

Chinese brands are gaining ground in the domestic market, signalling a shift towards greater self-reliance and home-grown innovation. This is evident on the roads, in homes and public spaces and in shopping malls. Chinese electric vehicle brands far outnumber foreign brands, local coffee brands such as Lukin and Manner are outcompeting Starbucks and Huawei is giving Apple a go. In clothing and homeware one observes Chinese and Japanese brands as more prominent although western brands such as Nike, Puma and Under Armour are standing their ground. And the Chinese love Ikea. Our visit to Ikea revealed it as a preferred “third place” for young and old and for families with children. Entertainment and eating out mixed with shopping are a winning formula. Hello Kitty and Disney are holding their own. One of the most ironic scenes on my trip was the statue of Captain America inside the Disney Flagship Store near the famous Oriental Pearl TV Tower in Shanghai. There is a general tolerance for “cuteness” and harmless entertainment, although I suspect it is a different picture in Beijing. The fifty TV channels are dedicated to Chinese content – game shows (many), talk shows, news and documentaries, children’s animation, soapies, sports (Ping-pong, Basketball and Badminton is big) and even a dedicated shopping channel.

Factories are not operating near capacity. I estimate it’s at half capacity in the areas we visited. However, there is immense appetite for doing business and getting production going at levels closer to pre-Covid. Many apartment buildings are standing half-built and empty, yet property prices and rents are still very high and comprise the largest expense/investment for most families. Child education comes a close second for aspiring families.

China is taking the economic pain for past excesses. It is also taking the bitter medicine to cure itself. Looking ahead, the road to economic recovery in China may be long and challenging, but there is a clear sense of determination and resilience. As the country focuses on technological self-reliance, boosting domestic consumption and expanding its influence in new markets, there is a sense of cautious optimism among investors and businesses alike. While there are still hurdles to overcome, such as addressing corruption and instilling confidence in consumers, the underlying resilience of the Chinese economy remains a key driver of growth.

Conclusion

Perhaps the most striking aspect of my visit was the ubiquitous culture of hard work, discipline and respectfulness. While certain western freedoms may be restricted, there exists a trade-off – a sense of order, safety and of a collective purpose. The landscape itself is undergoing a metamorphosis. The rapid electrification of cities, the dominance of electric vehicles, and the push for self-sufficiency in key industries all point towards a nation adapting to the modern world.?Chinese brands are making their mark domestically and internationally, signalling a shift towards greater innovation and self-reliance.

Don’t make the mistake of over-simplifying China, its internal dynamics and external relations as many using western media do. It is a complex and sophisticated country not without its own set of domestic challenges. No stereotypes exist. Learn to play Chinese chess as I did – it’s a good parallel for the dynamics at play. It’s fiendishly difficult …and exciting.

As a long-term investor, I would not classify China as “un-investable”. On the contrary, I believe that a recovery will happen and that it will present very attractive investment opportunities, but it will take time. The Chinese have a long view - they live by it and govern by it. We thoroughly enjoyed our trip – the places, the people and their culture, the food and business - and will return as soon as we are able to. Next time perhaps to the southern province of Guangzhou and some of the inland provinces?

In my next article on China, I will share the insights of my friend Charl Albertyn Ph.D who resides in China. Charl has developed a deep understanding of Chinese culture and the country’s evolution. We had a great conversation over a few beers at an Irish Pub in the old French Concession area of Shanghai and he obliged putting pen to paper and summarise his thoughts. It will be worth the read!

?*Disclaimer: This article reflects my personal observations and experiences. Viewpoints are my own and not that of my employer.

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