China’s rapid changes will have an impact on many American businesses. State companies import many products from China, and China is the United States’ third largest export market. Financial investments also flow back and forth between the two countries. The changes in the country will have major impacts on American businesses.
China grew rapidly after the reforms that began with Deng Xiaoping in 1979. Manufacturing expanded, exports increased, and then imports increased. The pace of growth slowed as the country matured. The problem now is President Xi Jinping’s heavy hand. Its increased regulation was recognized as a negative factor earlier this year, but two recent the Wall Street newspaper the articles highlight its latest moves that will slow economic activity. The first stressed Xi’s Maoist ideology and the desire to control the economy, while the second describes economic damage resulting from increased regulation. At the same time, real estate developer China Evergrande Group found itself in trouble, having accepted down payments for apartments it might not be able to complete, while owing substantial amounts to contractors and investors.
As if that weren’t enough, relations between the American and Chinese governments are also difficult. Donald Trump said during his first presidential campaign: “We cannot continue to allow China to rape our country. President Biden is more polite but fundamentally wary of China. Military tensions over information security and the South China Sea have erupted.
US companies are buyers of Chinese products to the tune of $ 435 billion a year and sellers to China of $ 124 billion in products. Services also move back and forth, but their dollar value is much lower.
Most companies that buy Chinese products will be able to continue their relationships, for the most part. The Trump tariffs were probably the worst we’ll see, although there is always the possibility that Biden will double that approach.
Products with information security components pose the greatest risk to importers. Either country could limit trade in goods that can store information, as they often have gateways to other data flows. No country government trusts the other these days.
Chinese companies with flamboyant wealthy owners are slapped. It will not help the workers of these companies to disrupt production and sales, but the Chinese government will use a few as examples to discourage ostentatious displays of wealth.
US exporters should also be aware that information security risks will permeate Chinese regulations. In addition, sales to Chinese companies owned by prominent entrepreneurs may be at risk.
Almost ten years ago, Dan Harris, a lawyer who works with American companies doing business in China, wrote, “The key to weathering China’s slowdown will be… getting back to basics: rethinking what a company contributes to the Chinese economy and how that is likely to shape the opinion of policymakers; focus on scrupulous regulatory compliance; and renewed attention to due diligence at the company-to-company level. Importantly, no Western company doing business in China should blithely assume that a downturn won’t affect it. This is wise advice today.
The current problems in China will lead some US companies to think more about sourcing materials domestically. Already, supply chain issues are prompting consideration of alternative suppliers, and political changes in China will push the issue forward for some companies.
Financial investments represent another challenge for American companies. Chinese investors bought a fair amount of US securities. In general, this is not a big problem. If investors are to get rid of their holdings, only a minor market shake will be felt. For other investments, such as private companies and real estate partnerships, continued participation will be subject to government policies and cannot be taken for granted.
US investors looking to put their money to work in China will find it more difficult to assess the prospects for potential investments. Having an ear on the ground in Beijing and regional capitals will be invaluable in filtering out efforts that would not be welcomed by current leaders. The key question to keep in mind is that the Chinese government will use a heavy hand to shut down companies it disapproves of. Foreign investors don’t matter.
China’s political changes are significant and will have major consequences for American businesses. Those caught off guard by these changes will face serious consequences.