China: Increasingly Isolated or Thriving?

Asia’s richest man, Gautam Adani says China ‘will feel increasingly isolated’ and find it hard to bounce back from a period of economic weakness, homing in on a continuing conversation about the status of China as a global power.

He said: “Increasing nationalism, supply chain risk mitigation and technology restrictions” would impact China’s global role and the sentiment is shared by many.

In September, the US government ordered two of America’s top chipmakers to stop selling high-performance chips to China while leaders of America’s biggest banks say they could exit China if it ever attacks Taiwan.

It comes almost three years after the outbreak of COVID-19 in China which caused economic turmoil on a global stage. It also exposed many vulnerabilities for global investors with one of the biggest being the risk of having a high amount of inventory held in a global supply chain. For Family Offices with operating businesses or investments in manufacturing and associated fields, this highlighted a tremendous risk.

The supply shock that started in China has only worsened with consistent trade restrictions and now, ripples are appearing across Europe following the conflict in Ukraine.

Manufacturers are now under pressure from their investors to increase domestic production, grow employment in their home countries, reduce or eliminate dependence on risky sources and rethink a fully global supply chain. Many US organisations are opting for a China + 1 strategy, trying to monopolise the effectiveness of an Asia-based supply chain with a local contingency. This could mean one or two things for China.

On one hand, this will take time as the rest of the world remains heavily dependent on China’s supply chain allowing it to thrive. While furniture and clothing could logistically make a move closer to home, for the automotive and pharmaceutical industry, this is almost impossible. Car makers do not know how to create the touchscreen displays their navigation systems require nor do they have the capacity to create the microprocessors needed to control the engine. Similarly and vitally, biotechnology companies that make the coronavirus vaccine amongst others rely heavily on chemical reagents to build their vaccines which derive almost entirely from South Korea and China.

Family Offices with operating businesses will, subject to the trends of the last few years, now need to map out their full supply chain and seek out their global vulnerabilities but while this had started as a geopolitical debate, concerned with crisis and conflict, as it clashes with climate concern, it becomes an even bigger conversation.

In 2023, organisations and Family Offices alike will need to consider their sustainability practices and the reputation it allows. This will involve lowering carbon footprints and making decisions that, make a statement. Importing parts and production where avoidable will present a dilemma and so the trend of importing, offshoring and saving money during the process will certainly be reversed. It all means China will play a smaller and smaller part in their investment strategies in the long run but in the short-term, can they really be isolated?

In many ways, China is thriving. Supply chain dependence aside and tourism is back on the cards in China. Not only are people travelling for pleasure either. As Hong Kong retains its draconian coronavirus measures and restrictions, high-net-worth individuals and professional services providers are moving into Greater China.

The government is also backing a $44BN investment in real estate in a bid to attract global investors and restore confidence in the industry. Global investors are carefully watching on as China's property market, along with related sectors such as construction, accounts for more than a quarter of the country's gross domestic product and it is set to boom.

While the odds seem stacked against China on a global stage, the World Bank believes that with government interference and aggressive policy stimulus can mitigate the economic downturn and actually stimulate growth.

In its 2022 China Economic Update, it said: “Growth momentum is expected to rebound. If the pandemic is brought under control and domestic restrictions are fully lifted, full year growth could be higher than currently projected, thanks to the recently announced additional stimulus measures.”

With an uncertain future not yet written-off, do you think China will become increasingly isolated or in fact thrive?