Joseph Chaney | June 01st, 2022

First things first: it feels somewhat frivolous to write a business blog when Ukraine is engulfed in war and deplorable images of suffering are flooding our computer screens on a daily basis.

And yet, when one lives a great distance from the conflict, life inevitably – some would say, mercilessly – grinds on. Landlords demand rent. Teachers assign homework. Clients expect uninterrupted services.

From our perch at N/N’s headquarters in Hong Kong, one of the most frequent questions following Russia’s invasion of Ukraine is how the conflict will ultimately play out for China – and what the war’s ripple effects may mean for China-focused thought leadership.

Complicating matters is the fact that China is currently dealing with a near perfect storm of challenges: from mitigating the economic impact of its ‘zero Covid’ policy, to stabilising its debt-ridden property sector, to managing the perceptions of an already spooked international investor class wary of its crackdown on the tech and education sectors.

The stakes could not be higher. Given China’s ‘no limits’ friendship with Russia, multinationals will likely have to explain their continued commitment to the world’s second largest economy in the months and years ahead; or, on the flipside, explain their departures (as Airbnb did recently, citing the impact of China’s ‘zero Covid’ policies).

On that note, we thought it’d be helpful to share a few of the key issues that our clients may have to address in their China-focused campaigns – assuming they aim to drive industry conversations on China-related issues in 2022 and beyond.

Attracting (and retaining) foreign investment


For starters, China is in a tight spot: Beijing is trying to balance its political relationship with Moscow, with its increasingly influential position in the international system.

By declining to join the 141 (out of 193) UN member states in outright condemning Russia’s actions, China risks further alienating the international investors it is trying to attract. The numbers tell the story: in Q1 US dollar private-equity funds that invest in China raised the lowest figure since 2018 -- just $1.4 billion.

Moving forward, financial firms will have to address China’s rapidly evolving risk profile if they want to stay credible. Of course, China ‘bears’ have been around for decades. But now even some of the bulls (who are the majority by a wide margin) are sounding the alarms.

In recent months ‘uninvestible’ is a word that keeps cropping up in regards to China – especially after a basket of China tech stocks, long the darlings of China’s market, shed roughly 70% of their value (since the peak in 2021) in March this year.

On that score, our banking clients could consider formulating campaigns around new China de-risking and/or portfolio diversification strategies. What are these strategies? What other markets in Asia offer similar – but less risky – returns, when compared to China? And what is the contrast with the pre-Ukraine, pre-Covid approach to China?

On the other side of the equation, banks and asset managers could also publish widely on price collapse and undervalued China opportunities due in part to billions in capital outflows. Or they could focus on China’s medical sector, given the government’s plan to spend US$52 billion this year on new Covid-related testing centres and related facilities and services.

The supply chain crunch

Guarding against capital outflows is just one of China’s headaches. Zero-Covid has put enormous pressure on the country’s supply chains and trading links. With supply further constrained due to war in Ukraine, inflation – on everything from oil to wheat to soybeans – is expected to soar.

To be sure, total trade between China and Russia jumped 35.9% last year to a record $146.9 billion, thanks to oil, gas, coal and agriculture commodities. But that’s only one-tenth of China’s combined trade with the US and Europe.

The reality is that China’s economic development is far more intertwined with the US and Europe than it is with Russia. Of China’s $3.2 trillion in reserves, roughly a third are in US treasuries.

Even so, multinationals are revising growth outlooks on everything from auto parts to chemicals used in X-rays – due in large part to ‘zero Covid’ production shutdowns. Millions of containers due to travel to Europe from China on train – via Russia – reportedly have to find new sea routes due to European sanctions on Russia.

Again, companies aiming to publish thought leadership on China’s trade links – or even its Belt and Road Initiative, which is seeking investment from around the world, with many infrastructure projects crossing national borders – will need to address these painful scenarios in their thought leadership.

Can China remain the so-called factory of the world? Which products and services are the most affected by the supply chain crunch? Perhaps our clients could give stakeholders a blow-by-blow score of which industries in China are most likely to survive the carnage relatively unscathed.

Going green

On the more positive side, ESG and green finance will remain a strong investment theme for China. China’s shift away from coal has been years in the making; and green awareness is sinking in for the average consumer: Domestic electric car sales soared 154% in 2021.

Covid-related shutdowns are likely to accelerate moves by China’s policymakers to build more resilient and sustainable supply chains. At the same time, policymakers have plans for increased government spending on more traditional forms of energy – which will not be abandoned until new ones are online. That means China’s moves toward ‘green growth’ – as with so much else in life -- will not take the form of a straight line. Be that as it may, China’s declaration of a zero-emission target by 2060 means this is a long-term trend – one that is unlikely to disappear, even despite the current setbacks.

These issues offer ample room for banks and asset managers to publish a wide range of thought leadership. Fixed income analysts can dig deeper into China’s ‘green’ classification for its green bonds; asset managers can investigate whether corporates are truly applying ESG standards, or are they playing shadow games and simply treating ESG as a box ticking exercise? And what does this shift mean for China’s state-backed oil giants, who are major suppliers of tax revenues and among the country’s largest employers?

In summary, the base case China investment scenario is fluid and complex. We could write books on each of the subjects outlined above. A short blog hardly does each of them justice.

Nevertheless, the key takeaway is that pre-Ukraine / pre-Covid China cheerleading will no longer do for those companies aiming to position themselves as experts on the world’s second largest economy. China faces a painful set of predicaments and challenges, many of which now involve unavoidable political overtones.

Companies that avoid addressing these issues – or who choose to sit on the fence with a wishy-washy ‘cautiously optimistic’ view – will risk looking like they aren’t part of the serious conversation.

For China-focused thought leadership, it’s no longer business-as-usual.

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