The once-thriving Chinese consumer is languishing. American companies are losing market share to Chinese rivals, writes Business Insider. Assailed by political and economic forces, American brands can no longer rely on China for their own growth. That changes the risk calculation. Why invest heavily in a market that is kicking you out? Without the promise of profits, American firms themselves are less willing to fight for the idea that the Chinese market is crucial to their success.
For decades, Wall Street and American corporations have preyed on the Chinese consumer. As ordinary Chinese households grew richer, money could be made by selling them anything from fried chicken to Fendi clothes. American companies such as Starbucks, Apple and Nike have been quick to grab market share. Despite some boycotts and setbacks, trends held high. And as long as the glorious rise of the Chinese consumer was as inevitable as the Chinese Communist Party claimed, the gains could only multiply. That was once upon a time. But now the story is falling apart.
Beijing is finding itself without friends in Washington – and the significance of the US-China relationship is shifting from building mutually beneficial economic ties to balancing competing national security interests. Instead of trying to revive the Chinese consumer and, by extension, restore critical economic ties with America, leader Xi Jinping seems unconcerned.
"Xi doesn't wake up every day, look at the economy and panic," Lee Miller, founder of polling firm China Beige Book, told Business Insider. "He thinks they're doing the right thing, and it's a bitter pill. "
In Xi's view, China must become indestructible and indispensable. That means supporting state-owned enterprises and other domestic firms, giving them a market advantage as they compete with foreign firms for a piece of China's shrinking economic pie. It means the rest of the world will become dependent on China's products – not just cheap goods, but advanced technology like semiconductors, batteries and artificial intelligence, but also commodities like gallium and germanium.
One component of the peace between China and the US has been the idea that we can do business with each other, even if we don't share the same values. The US strives to be an open society; China is increasingly closed. We may be clashing in the South China Sea over Taiwan over global resources, but it was money that brought us together. But without access to the Chinese consumer, US stakeholders have less reason to see China as a market and more reason to see it as a threat.
Decrease in demand
After the pandemic shutdowns ended in 2023, the Chinese economy experienced a slight recovery. Similarly, China's decimated economy recovered a bit once the COVID restrictions ended in 2023, but a year later, things look bleak. Beijing's 5% GDP growth target is now in question. Housing debt continues to drag the economy down, and the government's bets on an export boom do not appear to be paying off.
Prolonged deflation erodes the value of China's currency and ultimately means it has to sell more goods for export to make the same amount of money. Unemployment among Chinese 16- to 24-year-olds rose to 17.1 percent in July, forcing a new crop of (often overqualified) graduates to compete for low-paying jobs.
In past recessions, the Chinese Communist Party has reacted by injecting money—spending on infrastructure, housing, and maintaining jobs. This set the wheels in motion, but each turn left the country with an even bigger pile of debt.
Xi decided to stop short of doing anything to help ordinary Chinese households as the economy contracts. Xi told party members in July to show "unwavering confidence" in his grand economic strategy. Earlier this month, in an unusual departure from Xi's policy, former People's Bank of China chief Yi Gang said the government should commit to some sort of stimulus to meet its growth targets already mitigated. Inflation, as Michael Pettis noted, is driven by higher food prices due to shortages.
American companies felt the blow. At the beginning of the year, Apple iPhone sales in China fell 24% and have been on a downward trend ever since. Starbucks, which has more than 7,300 stores in China, posted a 14 percent drop in the second quarter. Nike's troubles in China have contributed to the stock's nearly 30% drop since the start of the year. Foreign car companies are also crushed. Even Tesla saw its EV market share drop from 9% to 6.5% in the first seven months of the year. CEO Elon Musk reacted: “Believing the news is nonsense. Our factory in Shanghai is operating at full capacity."
A recent survey of members of the US-China Business Council found that the issue of China's economic growth is the second biggest concern of US companies - a "real constraint that was somewhat unthinkable just a few years ago". The board reported that a quarter of its members cited "insufficient demand or overcapacity as the No. 1 constraint on profitability this year."
The money that Chinese consumers have left to spend is increasingly going to companies that grew up in their home country. Chinese phone makers are outpacing Apple, with Huawei smartphone sales up 70% in the first three months of the year. Starbucks opened its first store in China in 1999, which was seen as a status symbol, but now faces stiffer competition from Chinese brands such as Luckin and Cotti Coffee.
It's not an accident; it is part of Xi's plan to rid China of foreign dependence and influence. In the US-China Business Council survey, 80 percent of respondents said that "China's industrial policies are strengthening companies that were previously uncompetitive," and competition from Chinese rivals was the third biggest concern about doing business there.
Friends in Washington
America's elite financial firms will continue to say they expect to continue investing in China. Behind closed doors, however, Wall Street's power players are taking a different tone. It's not just about economic pressures, it's also about the political climate. It is not easy to do business in a country where data and people keep disappearing. Wall Street's shift in attitude is reflected in the flow of money to China: Foreign direct investment is at a 30-year low, and from June to early August, investors pulled $12 billion from the stock market chinese.
Thus, 2024 could be the first year in which capital outflows are recorded. But we can't know for sure because, in light of the stock dumping, China decided last month to stop publishing data showing net investment flows of foreign funds into mainland Chinese stocks.
The declining ties between China and Wall Street are particularly notable, given that Wall Street is a powerful ally in Washington. They organize meetings between stakeholders and discuss the benefits of the trans-Pacific relationship.
A former State Department official in East Asia said China is sending delegates to the meeting, but no one is willing to meet with them. Without allies, Washington is a lonely (or hostile) place for foreign governments, especially when those foreign governments have developed an economic strategy that can disadvantage the US economy.
"We're headed for a new trade war, no matter who's president," Miller said. "The economic model that Xi wants is not compatible with the rest of the world. The mindset is to look at things from a national security perspective, more rather than from an economic perspective".
Miller pointed out that a technological decoupling between the US and China is no longer an issue for Congress — it's a goal. "A lot of it is talking to American companies that have a large stake in China and saying, 'You can't do this to us,'" he said. "Well, guess what? There are trade-offs. Right now, no we pay a high enough price for the right policy."
The price of this change cannot be quantified in corporate profits. Putting national security, rather than economic cooperation, at the center of the US-China relationship concentrates it in a space where the two great economic powers are antagonistic.
Cordell Hull, US Secretary of State from 1933 to 1944 and Nobel Peace Prize laureate, once said: “Unfettered trade goes hand in hand with peace; high tariffs, trade barriers and unfair competition with war'.
It gives corporations, already under financial pressure as China's economy shrinks, even less reason to act as interlocutors fostering stability between Washington and Beijing.
Source Adevarul.ro
留言