Should foreign businesses have contingency plans? | The Signal with Lizzi Lee

Below is a transcript of the video:

Lizzi Lee: Hello and welcome to this episode of Live with Lizzi Lee powered by The China Project. I’m your host, Lizzi. Joining me today is Anne Stevenson-Yang, co-founder of J Capital Research. Thank you so much for joining me. So Anne we all heard the broadening of the anti-espionage laws in China. How do you think the new laws have affected access to China’s databases and archives and how this might eventually impact the abilities of foreign businesses to conduct research in the country?

Anne Stevenson-Yang: So I don’t think it’s relevant to talk about laws. China is not you know, laws are not relevant to what’s going on in China. And this particular cutoff of data has been going on since roughly 2018. The raids on Bain and Mintz and so on and a couple of companies are new, not in kind, but in scale, because in the past China has always sort of picked on small companies that don’t really have a lot of name or the resources to fight back very much. And now it seems like it’s up to a different level. So it does seem like a change, but a change in amount, not kind.

Lizzi: I see. So we heard about those police raids and visits to US research firms and due diligence firms in China, and that has worried a lot of people. Do you think those actions are direct results of the new laws or part of a larger long term strategy for China to restrict so-called foreign influence in the country?

Anne: So again, laws are the result, not the cause. So we can talk about policy issues and then laws, but things don’t happen because they pass laws. Secondly, I really don’t like it when people speculate about Chinese political motives based on what they see on the ground, because we really just don’t know and we don’t have the information. I think it’s wrong. What tends to happen is you tend to use your own paradigm from your own political system to to graft on to China a bunch of motivations that may or may not exist. So I don’t know why it’s happening.

Lizzi: But there are real consequences of those actions. What are some of the potential consequences, as you see now if those restrictions grow? Will it affect China’s attraction to global capital? Will it restrict China’s access to global capital. What are the potential consequences of the effects of those actions?

Anne: Well, I mean, the information, the market research that’s available, the economic data that’s available on the China market has always been quite difficult to use. And I don’t want to say really, really bad because there have been a lot of data streams that you don’t always get, but they’re not very reliable and incomplete and they come and go. And so market research in China has always been very difficult.

And the fact that that foreign companies and portfolio investors have invested anyway is really it’s really something to chalk up to the growth numbers that China was posting in the past. So people would say, well, you know, yes, it’s true that that I heard that the average salary of the of the average Chinese person is $500 a month. And yet people spend $20,000 a year on Alibaba or whatever. But whatever, I’m just going to buy it because it’s growing 20% a year. Well, now that that’s not happening anymore, the numbers, the fact that the numbers aren’t there, I think matters more. And there’s already been a great diminishment of interest in the Chinese market, and one can only think that will continue.

Lizzi: So what’s your read on the diminishing numbers? Should we assume the worst about the current state of the economy in the country?

Anne: You mean about the economic situation? I don’t really know what’s going on. I know that people post the most positive number rather than the most useful number. And so we tend to get headlines about, Chinese consumption has grown in the first quarter or, you know, properties bouncing back, or something without looking at reasonable comparables like, you know, 2019 before the pandemic started…. So I don’t think that so much data that’s available as the way China is really trying to frame the narrative and foreign journalists and foreign analysts, a lot of them just basically kind of repeat what’s in China Daily. So I don’t think it’s a matter of assuming this or that. I think it’s a matter of trying to take a hard look at what information is available.

Lizzi: You also mentioned that there’s a diminishing interest in the Chinese market that has been going on for a while. Can you unpack it for us? What are the factors contributing to that reduction in interest in the Chinese market overall?

Anne: Well, if we’re talking about everybody’s, it’s the reduction in growth. So, you know, China is a very risky market and China has not been a good market for providing profit to international investors. So they’ve been there for growth. And if the growth is going to go away, then so do the investors go away. And as interest rates have risen and as various risks have been increased internationally, you’ve seen a lot of a lot of shifting of portfolio flows away from China. So I think that’s kind of a natural thing to happen. But there are two two reasons why I personally am fatigued with China. One reason is that the same thing happens just over and over again. So the foreign world becomes all excited about indigenous innovation and then about solar technology and then about AI EV technology. And it’s really just all the same thing… And so it’s boring to hear again. And then the investment flows just, just keep coming and then the market will pop up for a while. But it’s all driven by investment. And so that’s boring.

The second thing is that I personally deal with companies that are listed on public markets, and a lot of Chinese companies are very heavily manipulated. And so it’s just not worth telling a story about what’s really going on in that company.

Lizzi: Right. But there are companies who still maintain their operations and objectives in China. For those foreign businesses still operating in China, what are your suggestions to them? How should they navigate and comply with the ever expanding set of restrictions and regulations in China?

Anne: I don’t know. I guess I would just have one foot in and one foot out and have a lot of contingency plans. There are a lot of companies that have very large facilities in China, whether they make steel or aluminum or ethylene or whatever it might be. And those companies can’t just pick up and leave, and they’re probably not interested in picking up and leaving. But they need to know, they need to hedge their bets to the extent possible.

So, you know, put as much production capacity elsewhere as possible and make sure that you have contingency plans. Keep your currency within China light, because it’s harder and harder to get it out and keep your foreign staff and China light.