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Kelly Evans Discusses How China Poses a Liability for American Companies

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China's Shifting Economic Landscape: From Opportunity to Liability

Reflecting on missed opportunities to visit China, the world's "Next Big Thing," during her college years, Kelly Evans explores the current state of China's economy. Despite initial expectations of China's dazzling development, the reality is quite different. China's post-Covid rebound has revealed larger economic challenges, transforming Chinese exposure from a profitable venture into a liability for many U.S. investors and businesses.

Challenges and Ominous Signs

Recent reports of Chinese officials being banned from using Apple's iPhones and the potential expansion of this ban to state-owned enterprises and government-controlled agencies serve as ominous signs. Such developments contribute to a larger trend as U.S. and Chinese officials debate the nature of the relationship between the two nations. Companies with high exposure to China have been underperforming since early 2022, with Starbucks and the tech sector being notable examples.

Vulnerable Industries

Industries such as semiconductors, autos, luxury retail brands, pharmaceuticals, and energy face potential trouble if their reliance on the Chinese market becomes more of a curse than a blessing. The tech sector, particularly semiconductors, has significant sales exposure to China, with shares of companies like Micron still trading well below their previous highs. Tesla, with its high China exposure, also sees its shares below previous highs, despite China's push to drive global exports in the automotive industry.

Cautionary Warnings and Uncertain Future

Analyst Derek Scissors warns against doubling down on China exposure, citing China's stagnant policies, rising debt burden, and unfavorable demographics. Furthermore, the risk of a potential Chinese invasion of Taiwan adds to the uncertainty surrounding China's future. Multinational companies may hesitate to make long-term investments in China given these factors. In conclusion, China's economic journey from emergence to potential decline has unfolded over the past 16 years. The once-promising opportunities have transformed into cautionary tales for businesses considering their involvement in the Chinese market. As China's economic landscape continues to shift, businesses must carefully evaluate the risks and rewards associated with their presence in China.

Conclusion: Implications for New Businesses

The evolving economic landscape in China presents a 'hot take' for new businesses, particularly those considering expansion or investments in the Chinese market.

Assessing Market Risks

China's transformation from a promising opportunity to a potential liability underscores the importance of thorough market risk assessment. New businesses must carefully evaluate the potential challenges, such as policy stagnation, rising debt, and demographic issues, before making investment decisions.
Reconsidering Market Exposure
Given the current economic climate in China, new businesses may need to reconsider their level of exposure to the Chinese market. The underperformance of companies with high exposure to China serves as a cautionary tale for businesses considering similar ventures.
Planning for an Uncertain Future
The potential for geopolitical instability, such as a potential Chinese invasion of Taiwan, adds another layer of uncertainty for businesses considering a presence in China. In light of these risks, businesses may need to rethink their long-term investment strategies in the region. In conclusion, the shifting economic landscape in China presents significant challenges for new businesses. While opportunities may still exist, the associated risks have increased considerably. As such, businesses must approach the Chinese market with caution, carefully weighing the potential rewards against the risks.
Story First Published at: https://www.cnbc.com/2023/09/07/kelly-evans-why-china-is-turning-into-a-liability-for-us-companies.html
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