China’s Macro Issues Are Your Macro Issues

I spoke at Oklahoma’s International Trade Conference yesterday about doing business with China, and I shared my top 5 macro issues with which China is dealing. I am adding two bonus items (both new laws) that matter depending on how your business engages with China. In typical Chinese (and lawyerly) fashion, I discuss both the yin and the yang, the cons and the pros, of each element:

1. Xi Jinping for Life

I read content from a lot of China experts, and at every opportunity when we interact in real time, I ask them whether there is any chance for a CCP regime change in the coming years and decades. I hear a resounding “no.” One exception is one of my co-bloggers, Steve Dickinson, who has been living and working in and with China since the 80’s, and who thinks the CCP’s system will eventually collapse and that we should be more worried about dealing with that ramp and cliff than anything else. Xi Jinping sees it another way. He continues to cement his role as one of the CCP greats and aims to do what prior leaders, including Mao Zedong and Deng Xiaoping did not. The upside to this, which businesses and governments crave, is stability. This will be stability with Chinese characteristics, but it is still stability, which equals reassurances, which translates into our ability to craft reasonably reliable risk scenarios for doing business in and with China.

2. Oh, Baby

The world has been discussing the potential and actual negative effects of China’s decades-long one-child policy for as long as China’s one child policy existed. China has been slower coming to the table, but the huge demographic and gender imbalance in China matters now and in the future, and China is starting to come to grips with it. Even China cannot (yet) clone its current generations of little emperors and empresses or make up for the gender imbalance to the tune of millions of missing females (see this impressive chart). There is really no upside to this scenario. However, China’s rising middle class is massive and has more spending power than any previous generations. That bodes well for consumption in the near term. This rising middle class is also extremely internet savvy, and their growing influence is manifested in the way they have expressed outrage at Chinese societal ills. They cannot comment on everything openly, but they are certainly aware of what is going on.

3. Energy Crisis

China’s international and domestic manufacturing and development successes* (*depends on who you talk to) have laid bare China’s insatiable need for manufacturing inputs, including energy to power China’s industrial complex. When I lived in Deyang, Sichuan nearly 20 years ago, it was my first time being exposed to rolling brownouts. China is still dealing with that issue, which is something I thought would have been resolved by now. The upside to this energy crisis is that China will continue to push for domestic innovation to address its energy needs, and it will continue to import massive amounts of energy from foreign markets that are prepared and willing to sell to China. The Biden Administration is opting for strategic engagement with China, so I do not expect energy resources to become an issue for U.S. energy businesses unless they are tied to other sensitive issues.

4. Environmental Issues

China continues to grapple with natural disasters, which always draw media attention and public ire, especially when poorly constructed development projects exacerbate the natural disaster. The CCP’s inability* to control the weather (*again, depends on who you are talking to) and simultaneously fully root out corruption is a bad combination for CCP leadership. China’s public desire to use more renewable energy while reluctantly using more coal to address its energy shortages means that China will continue to deal with environmental issues like air quality and how to deal with rising seas. For instance, the melting polar ice caps will increase the sea level in China’s Pearl River Delta area, where the vast majority of China’s manufacturing base is located. There are two potential upsides here: (a) China will continue to innovate to deal with these issues because they are systemic to China’s current way of life, and (b) China’s focus on domestic innovation will (hopefully) mean that they will have less time to focus on state-sponsored IP theft campaigns.

5. Xenophobia

China’s leadership has both internal and external xenophobia, sometimes manifested as mere disdain rather than outright hostility. China’s non-Han minorities have been and continue to be marginalized and persecuted. Countries outside China with different governance and belief systems are continually bad-mouthed or their influences are intentionally deleted from cyberspace. China paradoxically continues to try to woo foreign companies and talent while strong-arming those foreign companies and individuals once they are in-country. I see significant potential upside in our continuing to engage in and with China (see China Paradox Webinar Series: The Postscript). The only way to make lasting change is with one-by-one person-to-person interactions. Those can occur in China (for those of us that are still welcome in China) or anywhere else in the world. I do not think that the West has an iron grip on kindness, goodness, fairness, friendliness, innovation, or anything else we think we are good at. But we should recognize that people’s hearts and minds change all the time, often only in small increments. We should not get discouraged.

6. Two Bonus Topics

Above, I mentioned two bonus topics, both wrapped into recent Chinese laws: the 2020 cybersecurity law (see China Cybersecurity: No Place to Hide) and the 2021 data protection law (personal information protection law or PIPL) (see China’s New Comprehensive Data Protection Law). Both laws are problematic because a good amount of a foreign company’s data must be stored on servers in China, and those servers will be open to examination by Chinese officials. The slim upside to these laws is that we know exactly where we stand with our Chinese-related data: it is an open book and will be if you want a business presence in China. As optimistic as we want to be about the potential for rule of law in China, remember that we are dealing with “rule by law” and that everything we discuss is “XYZ with Chinese characteristics.”

I remain fundamentally optimistic about engaging with China through a smart business plan. There are plenty of equally risky places to do business in the world. We just need to recognize, plan, and navigate the issues that are important to your business.

What other macro issues do you think should be added to this list?