Chine 2024, crisis and opportunities

Those who survive to 2024 will be winners

Geoffrey WU PERROT

December 24, 2023

*English version below

It had been a year since I had set foot in China. This country, its policies, its trends, its markets are changing very quickly and it was high time to go back for an update on the ground.

After two intense weeks of professional and personal reunions, here are my conclusions:

After the post-Covid reopening a year ago, many expected a lightning recovery of the Chinese economy. Today we have proof to the contrary: growth has not resumed, 2024 will be at least as difficult a year in most sectors. The country's authoritarian health management in 2022 has damaged the most important factor of an economy: trust.

Taxi drivers (Didi and company) told me that even the traffic jams are less severe than in 2021; some of these drivers are in fact struggling entrepreneurs who get behind the wheel to make ends meet.

Reduced consumption, the Shanghai pace is slowed down. The bustling streets that I knew even during the Covid period (2020-2021) have become much more empty. The vitality is still there, the cafes are full, the restaurants too, but the queues to get in are very reduced and the shopping centers are quieter, some have closed; and many stores have not found new tenants after the 2022 lockdown.

Here is the feedback from a branch manager of ICBC (Industrial and Commerce Bank of China) in Shanghai: "We banks are doing well, we have funds. Our customers save and no longer invest, they have become very conservative. They are not buying real estate at the moment because the market is not good so they are waiting. "This saved money is hanging, does not know where to go locally and is very restricted on transfers abroad.

The business world is no more optimistic, and most of my interlocutors confirmed this to me.

Many foreign companies have redirected part of their purchases to Southeast Asia (Malaysia, Vietnam, Thailand, etc.). China, which exports, has therefore lost market share.

The industrialists who made China the workshop of the world are in trouble. Layoffs of workers have exploded, and a price war has begun.

Local orders are also down. The most obvious, almost caricatured example is the situation of medical device producers. The director of a company producing inflatable medical mattresses explained to me that its largest and most stable customers are hospitals, which are subsidized by the State, but the expenses related to PCR tests in 2022 were such that the budgets are dry. Direct impact: the company notes a 15% drop in sales in 2023.

The economic slowdown has of course also affected foreign companies that have invested in the Chinese market. For many, the uncertainty and the lack of short-term results have been prohibitive: those who do not have the resources to maintain the Chinese adventure have often decided to abandon it. It has also been a hard blow in terms of human resources. In 2022, the foreign population of Shanghai has been halved and finding an international executive profile has become difficult or very expensive.

The economy will not recover in 2024, and the 2025 results are uncertain. According to a local consultant, the difficulty in assessing a recovery date and a trend is that contemporary China has never experienced a lockdown like during the Covid period: the usual cycles are no longer usual, consumer behavior is unpredictable.

Stop reading here, and you too will abandon the idea of working with China. A big mistake in my opinion, and here are my arguments:

1 – Demand for premium and high-end products will pick up.

Because Chinese production is going downmarket: The general mood is gloomy, but the Chinese are hardworking and especially fierce in business. Chinese prices had tended to increase with wages over the last decade. However, the ongoing price war is dissuading them from investing in quality.

Because while the middle class is in great difficulty, the rich remain rich. According to a contact in the field of high-end watches, the luxury market is stable or even increasing. The main question for the wealthy is the search for investment opportunities.

The need for premium and high-tech products will not disappear: it is the opportunity for European companies that can or dare to stay in China. Those who survive 2024 will be winners.

2 – The Chinese government reacts.

The central government cannot afford to see its economy in difficulty for too long. It needs internal consumption, foreign investment, and growth. It will play skillfully between increased digital control of flows and information, and an opening towards the outside world. An important signal is the visa exemption for French, German, Italian, Dutch, Spanish and Malaysian nationals for short stays from December 1, 2023 to November 30, 2024.

Just remember that the Chinese government's influence over its economy is crucial and that for its own stability it needs a satiated and economically satisfied people.

3 – Made in China is an opportunity.

Many Western business leaders have shifted their sourcing to Southeast Asia, partly because China has been at a standstill due to its lockdowns in 2022, and partly because Chinese prices have become less competitive. However, the trend is to return to China for purchases of products requiring intermediate quality. Mixed China-Southeast Asia sourcing is likely the long-term trend.

Also, the difficulties encountered by Chinese entrepreneurs push them abroad to expand their markets. They are on the lookout for development opportunities and partnerships.

Geoffrey Wu-Perrot

geoffreywp@doublelink-consulting.com