Demystifying the Middle Kingdom Chapter 3: Work and Business

The hyper-globalisation phenomenon of the 1990s to 2010s fueled an unprecedented influx of foreign capital seeking to cash in on China's rapid growth, and the economy expanded immensely, so much so that anything <10% GDP growth rate in any of those years was seen as mediocre year for the behemoth economy.

Asia's largest economy comprises of 1.41 billion people speaking a unified language and vying for space in a crowded economic system, in the economic drivers of Shanghai, Beijing, Guangzhou and Shenzhen. Large and deep, this intricate ecosystem has evolved as the world enters into a likely prolonged period of de-globalisation.

风水轮流转 - The Winds Of Change

With the advent of COVID-19, China experienced severe economic shocks, both from geopolitical sources and from internal policies that on surface, seemed to play counter-logical towards economic reasoning. Fearing a collapse of a longstanding and burgeoning debt bubble, the government clamped in on large real estate institutional debt limits, and passed policies that near decimated other industries.

For decades, Chinese consumers soaked up real estate, perceiving the asset class to be fail-proof and their best hope of multi-bagger investment returns. Across the country young people made it their life mission to buy property, often taking on expensive loans just to finance their dreams. In fact it was commonplace for families to buy multiple properties as investments and even as wedding gifts. This had in turn led to indiscriminate building that resulted in structural oversupply, sprouting ghost townships and empty new cities. As economic blows to the industry accumulated, reality dawned swiftly and unrelentingly.

In the real estate segment, dominoes began to fall. Industry giants such as Evergrande and Country Garden, long heralded as dominant industry forces, found themselves suddenly and hopelessly over-levered, and began to struggle to make debt and vendor payments. Reports began swirling that employees were not receiving their paychecks and vendors were not receiving their payments. As a consequence, consumer confidence in the asset class began to fracture. Tier 2 and 3 cities saw property valuations fall by 40-50%, as the China bull market game of musical chairs came to a crashing halt.

Tech players also bore the brunt of abrupt policy changes. Brash rhetoric from business leaders led to state sanctioned blocks of IPOs and strangulation of critical game licenses that represented a large revenue stream for tech giants. Big tech took a huge beating, and began embarking on workforce reduction programs, also slashing pay packets in the process.

The deletion of net asset values severely hurt the Chinese consumer. Known to house the majority of their wealth in real estate, Chinese investors were now facing high debt payments from the acquisitions of previously high property prices. as the public markets also began to falter, consumer personal net worths were also impacted negatively. In response, people across China started tightening their belts, cutting down on previously exuberant spending.

Adding to economic woes, foreign direct investment began fleeing the country, some making a complete and abrupt exit. This, along with the other workforce shrinkages, precipitated a swell in manpower supply, as hundred of thousands were laid off and now in the market seeking jobs. Prior to COVID, one would struggle to find rides on ride hailing apps when it rained in Shanghai. Now, rain or shine, rides are abundant, as many people lost their jobs and turn to ride hailing as a source of income.

Systems built to accommodate supernormal growth now faced normalised and even muted growth, and as such had to optimise themselves. The forces of supply and demand then resulted in many doing more, for less.

内卷 - Hyper-Competitive Race To The Bottom

There's no apt English translation for the Chinese term "内卷". Used as a verb, adverb and adjective, the word "卷" is used to describe exceptionally hardworking people or their behaviors to achieve progress simply by the means of outworking everyone else, with diminishing rewards and an unexpanding overall resource pool to draw from.

A good way to describe this concept would be the following:

Imagine a small main street in a sleepy town with a singular cafe that operates from 8am to 3pm daily. Suddenly a new cafe pops up, operating from 7:30am to 6pm. This causes the first cafe to now have to work harder, for less market share and revenues. When a third cafe pops up, selling coffee at a 20% discount, its now a race to the bottom, and while the coffee consumers rejoice at increased options and cheaper coffee, eventually the business of cafes on the street is now unviable.

Such is the state of the work environment in China. The overall pool of jobs shrank, assets devalued, and consumer spending fell off a cliff. Businesses and their workers are consequentially, having to work harder and longer to compete for a shrinking pool of revenues. The Chinese are known to be good at being hard on themselves, constantly setting new benchmarks for service quality, price competitiveness, and speed of service as a precondition for survival.

To survive in China, one must be prepared to work harder, faster, and better than one would in say, Europe or America. If you aren't willing to go that extra mile in your work, guess what, there are a thousand more people willing to do it, and a large portion of these people also willing to do it at a lower cost. There's no room for complacency or to slack off, and the local populace has since acclimatised to the brutal nature of work in China.

火炼猛将 - Fighters Trialed By Fire

As the Chinese economy slowed, the top-of-the-pyramid white collar job count also began to contract. In Shanghai many of my colleagues weren't originally from the city, and had worked hard to (very literally) outcompete hundreds of millions of people from all around just to land high paying jobs with good multinational companies in the Tier 1 cities.

Chinese people from the Boomer and Gen X to Millenial generations have had to compete for most of their lives, starting as early as their formative education years. Getting into the good schools isn't easy. The infamous 高考 or The Nationwide Unified Examination for Admissions to General Universities and Colleges is a fierce competition to qualify for the best and most storied universities in the country, and which university one is admitted to oftentimes determines the job opportunities they graduate with.

Unshielded from the harsh realities of life, Chinese people understand and accept that making mistakes and falling victim to bad acts from others are a way of life. They deem the experiencing of such negative events as ”交学费“ (paying school fees), and see these as a rite of passage. In all my travels I have not seen such a permeating and uniform resilience present in a society's value system. While variances in skill, wisdom, and intelligence definitely presents itself in Chinese society, the common denominator across the majority of Chinese people is sheer grit and resilience, and a value system that extols "上进心" or the notion of self development.

Trialed by fire, I've noted that a great majority of white-collared Chinese workers are extremely diligent and apply themselves to their tasks, seeking to perform at speed and with effectiveness. They have acclimatised themselves to working hard and for very long hours, and have survival instincts that most in developed western nations lack. The Chinese are hard on themselves, knowing how to pull back and batten down when times get tough, showing almost no signs of self pity. This resilience was one of my biggest takeaways observing these people in my time in China.

向外扩展 - China Outbound Expansion

Imagine an F1 driver currently competing on the grid of the 2024 season. He's been driving against the top drivers for >20 years of his life, starting from go-karts to Formula 3, then 2, and finally at the pinnacle of the sport. Now take that same driver and put him into a local motor car race in Thailand. What do you get? A massacre.

Forged in the fire of hyper-competitiveness in their local market, Chinese enterprises are beginning to consider opportunities abroad. The soft Chinese market is no longer expanding and as the pool of revenues/ profits begin to dry, these enterprises begin seeking earnings offshore, taking their exceedingly competitive products and services to other markets.

In Singapore, wherein much Chinese wealth has flowed, we saw an influx of Chinese businesses also sprout up in the years during and after COVID-19. Large minimarket chains and F&B brands began making their marks in the island state, accompanied by the supporting supply chain players. Smaller F&B entrants also began entering the market, resulting in what is perceived to be an imminent decimation of locally owned F&B businesses.

Walk around in Shanghai and you'll see almost 80% or more of the cars on the roads being electric vehicles. Along with solar panels, these have become one of the nation's largest exports, with total units shipped internationally totaling 1.5m units in 2023, representing 58% of total global EV production. As China grows from being the world's outsourced factory to move up the value chain and become a sophisticated product exporter, we should expect to see more of this in the years to come.

Ever since Donald Trump's first term in office, the US has been in a near perpetual trade war against its new mighty competitor. Cross-border tariffs have been leveled at goods and services on both sides, resulting in higher prices ultimately borne by the consumer, and Chinese firms exploring offshoring methods to continue selling product to the US, via Mexico, Canada and other channels. Entire manufacturing towns have sprouted up in these conduit countries, as Chinese producers seek to circumvent US tariffs.

As such, people and their governments should take note of Chinese entry into their markets. While competition is always good for the consumer, the fact that Chinese businesses are so adept to extreme competition could result in the complete overrunning of local ecosystems if left unchecked.

有意义的市场 - Largest TAMs in the world

While venture building in China I came across a common saying - 市场不过二十亿毫无意义. Translated it means that people deemed it pointless to build products with a total addressable market (TAM) <RMB 2b. Businesses were so used to seeing giant TAMs in China that anything less than that was seen as objectively meaningless. Even with the battered economy, China still possesses breadth and depth unmatched by other markets in Asia.

Everything has volume in China. With a 1.4b strong population, you'd be hard pressed to find a product that did not produce a TAM of more than US$500m. A friend once joked that should all the bicycles in China could likely cover every square inch of the island a few times over, Singapore would not have space for people to walk in. With a 1.4b strong population, you'd be hard pressed to find a product that did not produce a TAM of more than US$500m.

Such is the nature of this economy, in which a massive and newly rich demographic drives domestic and international demand. Being a single unified state with a singular national language and currency, one can perceive China to be the largest contiguous market in the world, enabled by a startlingly optimised supply chain system and even more proliferate digital payments ecosystem.

I was amazed at how VC funds were investing into domestic start ups in the F&B space. Most VC funds only invest into supernormal growth sectors like tech and healthcare, where capital investments could be returned in multipliers due to the nature of the sectors. F&B on the other hand, could only at best return 20% margins even for the most optimised companies, but in China, where labour is still relatively cheap, and expansion opportunities so wide, plays in F&B became feasible even for early stage capital.

自立自强 - A shift towards self-reliance

As the modern world fractures, China is increasingly thrust into political spotlights as a hot button topic. In the past 5 years we've seen an marked uptick in Western vilification of China, with accusations of espionage, unfair trade practices, and in earlier years preceding COVID-19, currency manipulation. Economic complaints aside, tensions have been rising in the South China Sea for many years, and Taiwan continues to be a hot potato, with the Chinese government constantly defending their claim to the island.

Geopolitically-driven economic changes have been sweeping, extending into banning of hardware and software companies on alleged espionage concerns, to the sanctioning of companies for alleged human rights violations, and banning of high-tech material exports. The US is but one of the many players in this geopolitical drama. India, Australia and the EU have also been in the fray of exchanging tit-for-tat bans and tariffs with China.

Such has driven the Chinese to look towards self sustenance and shift gears into a policy of economic control as opposed to unbridled economic growth. In recent years companies begun promoting a "China-for-China" consumer campaign, with brands stepping up their China game to compete for local consumer demand. From EVs to watches, to airplanes and microchips, China has pushed for large developments to ensure its own economic and infrastructural security to guard against future uncertainties.

One might already note that the Chinese technology ecosystem is somewhat closed to the rest of the world. Super apps like 大众点评，饿了么，美团, Alipay and WeChat have grossly limited functionalities unless one registers with a Chinese phone number. Most Chinese consumers use Baidu cloud services, as other foreign cloud services are either not present in China or are very slow in lieu of the Great Firewall. Apps such as WhatsApp, Facebook, Instagram, and Snapchat all require the use of a VPN to use in China.

China has now begun manufacturing its own critical technologies, ranging from civilian/ commercial to government/ military applications. Electric vehicles are just the tip of the iceberg - last year for the first time, I sat in a COMAC 919, China's first short to medium haul commercial aircraft from Chengdu to Shanghai. Gaudy lighting aside, the C919 flew just like any Boeing or Airbus aircraft did, and in fact felt like a smoother and sturdier ride as opposed to Boeing's 737s. This shift towards decreasing reliance on foreign products has extended into military craft such as aircraft carriers and weaponry, and even into space exploration.

Rounding Up

In my next and final chapter in this series, I will be laying out the "so whats" I derived from all the observations in chapters 1 through 3 for discussion/ debate.