China’s Xi Jinping a danger to American business

Xi Jinping behind statue of Mao Zedong

China’s rapid changes will impact many American businesses. Companies in the states import many products from China, and China is the third-largest market for U.S. exports.

Financial investments also flow in both directions between the two countries. Changes in the country will have major impacts on American businesses.

China grew rapidly after reforms that began with Deng Xiaoping in 1979. Manufacturing developed, exports surged, and then imports grew. The pace of growth slowed as the country matured. The problem now is the heavy hand of President Xi Jinping.

His increased regulation was recognized as a negative factor earlier this year, but two recent Wall Street Journal articles highlight his latest moves that will slow economic activity. The first stressed Xi’s Maoist ideology and desire for control of the economy, while the second described economic harm from increased regulation.

At the same time, property developer China Evergrande Group fell into trouble, having accepted deposits for apartments it may not be able to finish, while owing contractors and investors substantial amounts.

As if that’s not enough, relations between the U.S. and Chinese governments are also rocky. Donald Trump said during his first presidential campaign, “We can’t continue to allow China to rape our country.” President Biden is more polite but fundamentally distrusts China. Military tensions over information security and the South China Sea have flared.

American businesses are buyers of Chinese goods to the tune of $435 billion a year, and sellers to China of $124 billion of goods. Services also move in both directions but are much smaller in dollar value.

Companies purchasing Chinese goods will mostly be able to continue their relationships—mostly. The Trump tariffs were probably the worst that we’ll see, though there’s always the possibility that Biden will double down on that approach.

Products with information security components constitute the greatest risk for importers. Either country could limit trade in goods that can store information because they often have gateways to further data flows. Neither country’s government trusts the other these days.

Chinese companies with flamboyant rich owners are being slapped down. It won’t help workers at those companies to disrupt production and sales, but the Chinese government will use a few as examples to discourage ostentatious displays of wealth.

U.S. exporters should also be aware that information security risks will pervade Chinese regulations. In addition, sales to Chinese companies owned by high-profile entrepreneurs may be in danger.

Nearly a decade ago Dan Harris, an attorney who works with American companies doing business in China, wrote, “The key to weathering China’s slowdown will be … to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Above all, no Western company doing business in China should blithely assume that a slowdown won’t affect it.” That’s wise advice today.

The current issues in China will lead some American companies to give more thought to sourcing materials domestically. Already supply chain problems are driving consideration for alternative vendors, and China’s political changes will advance the issue for some companies.

Financial investments pose another challenge for American businesses. Chinese investors have bought a good amount of U.S. securities. In general that doesn’t pose a big problem. If the investors have to dump their holdings, only a minor market tremor will be felt.

For other investments, such as in closely-held companies and real estate partnerships, continued participation will be subject to government policies and cannot be taken for granted.

American investors looking to put their money to work in China will have a more difficult time evaluating the prospects of potential investments. Having an ear on the ground in Beijing and regional capitals will be valuable for filtering out endeavors that would not be looked on favorably by current rulers.

The key issue to keep in mind is that the Chinese government will use a heavy hand to stop enterprises they disapprove of. Foreign investors are of little consequence.

China’s political changes are big and will have major consequences for American companies. Those who are caught flat-footed by these changes will face grave consequences.

Source: Forbes

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