Keeping COVID-19 out while building up domestic consumer brands and publicly listed companies are all major themes for China this year

For the last several years, the managing directors at LehmanBush made some predictions about emerging trends for Mainland China at the beginning of each year.?

But the world continues to deal with COVID-19, and a pandemic tends to throw off predictions.?

As more countries begin opening and eliminating COVID-19 restrictions, the world appears to be moving on from the pandemic.?

Less so for China, which continues with its COVID-19 zero strategy, and a rejuvenation of its domestic consumer class. This all against the backdrop of some serious economic structural concerns, particularly with real estate and debt financing.?

LehmanBush looks at three trends to consider for the current year.

CHINA TO MAINTAIN ZERO COVID-19

China has maintained a COVID-19 zero policy for all the pandemic, a strategy that is unlikely to be altered in 2022.?

With the zero-COVID-19 policy, infected individuals are identified and isolated in a designated hospital (if not in their homes) so that they can’t spread the virus. All close contacts of the infected individuals are then watched and monitored. The immediate area where these individuals can even be locked down, isolating groups off from the larger community. These measures are kept up until the patient tests negative, guaranteeing they no longer pose a threat. Contacts continue to take tests until officials are convinced there isn’t a case they are missing. After that, the lockdown can be lifted.

Modeling from the country's health officials suggests that even with 80–90 percent of the country vaccinated with domestically created vaccines, China would experience huge numbers of hospitalizations and deaths if it relaxes its zero-tolerance strategy while a variant with similar properties to those of omicron is spreading globally.?

"It makes little sense for China to open to international travelers, or even allowing Chinese nationals to leave and potentially bring back COVID-19, as long as the pandemic continues to produce worrisome numbers of infected persons globally,"?says Edward Lehman, founding partner at LehmanBush. "Until China feels comfortable with the global number of positive cases, that is to say until the numbers dwindle to safely manageable figure, China has no incentive to open back up."

DOMESTIC CONSUMER BRANDS GAIN GROUND

As one of the largest consumer economies in the world, China has been awash with popular international brands for decades — Adidas, McDonald’s, Ford, Starbucks, to name a few.

But with the largest middle class on the planet, local domestic brands are finding their voice among consumers seeking domestic brands.?

Heytea, the Chinese teahouse chain — valued at more than 60 billion RMB ($9.3 billion USD) — tapped UBS Group AG for a potential Hong Kong initial public offering in 2022 and is expected to raise at least $500 million USD in an IPO.

In November 2020 YATSEN, the parent company of Chinese cosmetics company Perfect Diary, was officially listed on the New York Stock Exchange, becoming the first Chinese beauty company listed in the United States. It is now one of China's most popular beauty products company. As an example, in 2019, Perfect Dairy became the top Chinese makeup brand to achieve 100 million RMB ($15.7 million USD) turnover within 13 minutes on China's Tmall e-commerce platform.

With 350 locations across China, the country’s largest pub chain Helen’s International went public in September 2021 in Hong Kong, raising $340 million USD in its debut. As shopping and social interactions have moved online across China, Helen’s has positioned itself as the physical gathering space for younger Chinese.?

"There has always been this idea that one day Chinese domestic brands are going to overtake their western counterparts across all of China," says Bobby Afshar, managing director at LehmanBush. "But it isn’t really a disposing of western brands altogether so much as it is Chinese labels finding their market and gaining traction domestically."

MORE PUBLIC COMPANIES TO MOVE TO HKEX

Hong Kong Exchanges & Clearing (HKEX) recently implemented changes to its rules for secondary listings that now make it easier for U.S.-listed Chinese companies to re-list in Hong Kong.

Effective January 1, Asia’s third largest stock market is now allowing listings of so-called blank cheque companies, widening the pool of overseas companies that qualify for listing, and increasing profit thresholds for new listings. The reforms are expected to help the exchange bounce back after funds raised from new listings shrank 20 percent year on year in 2021, the first such decline since 2017.

The relaxed rules for company re-listings bookend the U.S. Securities and Exchange Commission’s 2021 rules allowing the market regulator to ban foreign companies listed in the U.S. from trading if auditors do not comply with requests for information from American regulators.

Chinese ride-hailing giant Didi — which ran afoul of China's regulators in 2021 for listing despite domestic data privacy concerns — is already starting to delist from the New York Stock Exchange.?

And high-profile Chinese companies already with dual listings in the U.S and Hong Kong include e-commerce giant Alibaba, rival JD.com, search engine giant Baidu, gaming firm NetEase and social media giant Weibo.

"Ahead of any major confrontations stemming for accounting disclosures between Chinese publicly listed companies and U.S. regulators, expect this to be the year Chinese companies use to move their shares to Hong Kong," says Lehman.?