Xi Jinping’s U.S. Visit
If you have been paying attention to the headlines, you know that China’s Xi Jinping and US President Joseph Biden are meeting in San Francisco this week. They last met in person a year ago at the G20 Summit in Indonesia. The US and China at national levels have continued to drift apart for years due to significant ideological differences, and US companies and their non-US counterparts have struggled in making decisions about straddling the geopolitical divide. We know this because we have been helping companies from the US and its allies decide how and whether to mitigate their China risk by developing a “China+” strategy (see Due Diligence in China Just Got a Lot Harder: Now What? and Who is Still Doing Business in China?).
Until very recently, the CCP under Xi Jinping has generally been ignoring US cabinet-level requests for more engagement. For many months, China did not reciprocate visits to China by Secretary of State Antony Blinken, Treasury Secretary Janet Yellen, and Commerce Secretary Gina Raimondo. Chinese leadership has continued to display a stiff upper lip, maintaining that China’s rise is inevitable and that it is the best alternative to a US-led world order.
The CCP can only whitewash China’s economic decline for so long. Xi Jinping’s visit this week underscores the message that will not be circulated publicly in China media circles: China cannot succeed alone.
The China Business Scene
We deal with clients of all types in their China and China+ (diversifying away from China) work. Our clients run the gamut from low-tech to high-tech and include small and medium-sized enterprises (SMEs), large private enterprises, public companies, venture capital funds, and private equity groups.
Each of these companies has different motivations and goals for engaging with China. Many SMEs are still just trying to survive on thin margins as a result of US tariffs, COVID-19, and rising interest rates. Larger and public companies struggle with the same issues but generally can adapt more quickly than SMEs. Companies of all sizes are concerned with China’s increasingly bellicose relationship with Taiwan and its increasing closeness with Russia, Iran, and North Korea.
We have seen an acceleration in inquiries since 2022 regarding LatAm and particularly Mexico as an alternative to China (see Leaving China for Mexico: The Challenges and Opportunities). Many successful public companies, like Apple, have significantly deeper pockets and started hedging their China business risks years ago.
The China Investment Scene
Venture capital trends (see here) show that China investment in 2023 has dropped by an eye-popping 31.4% from 2022 levels on an annualized basis. The aggregate level for VC investment in China in 2023 will likely fall below 2016 levels.
Hedge funds provide similar indicators. Warren Buffett’s Berkshire Hathaway made news a year ago when it began divesting from China-related stocks, including Taiwan’s TSMC. Ray Dalio’s Bridgewater Associates made similar moves, cutting its China portfolio by 60% since September 2022.
Understanding China Today Through the China-Facing Private Equity Market
In our client circles, nowhere are these China trends more apparent than in the private equity world. Private equity is different from venture capital and hedge funds. Venture capital focuses on the China startup scene and focuses on a 5-10 year horizon. Hedge funds focus on publicly listed Chinese companies and their securities and derivatives: stocks, options, and futures.
Private equity firms typically look for market inefficiencies in the China SME space. They identify struggling or promising companies with an established track record. Then they acquire those companies and their assets and deploy their expertise and capital connections to build better companies out of disjointed players. And because of this expertise, they are often buying and selling companies at a blistering pace, sometimes with a turnaround of only a few months.
We particularly like using private equity deals as a proxy for gauging the general China business environment sentiment. We do this because PE groups are M&A experts and consistently sit on both the buy and sell side of the China business world.
It should come as no surprise that the private equity trends have been negative, as well. Buyers are requiring valuation discounts three to four times higher than those typically found in US and EU deals. All these downward trends have finally required China’s leadership to reengage with US leadership.
What Changes After the Biden-Xi Meeting?
This week’s détente indicates that China’s leadership understands the problem China is in. But in tacitly acknowledging that China needs the US and other allied nations, we should not mistake this meeting as a significant pivot of the Great Ship China.
China has been promising market reforms for decades while simultaneously engaging in covert and overt economic warfare with the rest of the world. China has even been championing its legislated market reforms as proof of its compliance and goodwill while at the same time employing its rule by law to ensure it reaches its economic and political ends by any means necessary.
Xi Jinping is and will always be an expert politician, which can at times make him look like a pragmatic businessman. But don’t think for a minute that this charm offensive will be grounds for any significant movement in China’s political will. That is the real rudder in the Great Ship China.
At the same time, don’t count out the Chinese entrepreneurs. This year I have been working with and opposite some of the most creative, determined, pragmatic, and optimistic Chinese businesspeople I have ever met. Those that have persevered and even succeeded the past few years will continue to succeed, with or without the Chinese government’s help. Those are the types of business partners to find and engage with. We will keep an eye on the investment indicators, especially the private equity market dealing with Chinese assets owned by US companies.
For U.S. businesses and investors, this meeting should be a cue for cautious optimism. Engaging with Chinese counterparts, especially in sectors where China is showing openness to reform and collaboration, could yield mutual benefits. However, maintaining a diversified approach, as seen in the growing interest in markets like Mexico and Latin America, remains prudent.
The U.S. and China, as two of the world’s economic powerhouses, hold the keys to not only their prosperity but also to shaping the global economic landscape. Their decisions, post this meeting, will be watched closely, as they will influence international economic policies, trade dynamics, and geopolitical strategies in the years to come.