It has been a relatively productive two weeks in Singapore.
Most of the conversations I have had ranged from my life in Hong Kong to opinions involving the current state of affairs in China. A few common themes consistently came up and I thought it might be a good idea to summarise them here.
China will open up... eventually.
There is no denying that supply chains, the over-leveraged property sector and the broader economy has been impacted. This has likely resulted in a slowdown of the economy (hard to verify if any of the public disclosed figures can be relied on).
There's a lot of noise involving the recent protests, possibility of further lockdowns, speculation over when travel will open up etc. No one really knows. The concern over handling foreign infections is understandable given that China has over a billion people. Just imagine the toll on healthcare infrastructure if a billion people went to the hospital at the same time. That being said, we can be sure that China will eventually open up. Its interest for doing business with the rest of the world remains intact. There is no way to prove this, it's just a matter of time. However, given the elevated cost of funds in today's environment, time unfortunately also means more money.
A changing demographics and mindset is shaping the new world economy.
Persistently high youth unemployment rates might pose a longer term problem for the economy. 躺平 has obviously been one of the catalysts, but the contraction of jobs supply is partly also due to the crackdown on big tech and edu-tech over the last year, the imploding of the property sector, and the more recent cost-cutting measures observed in various household tech giants such as JD.com and Sea. There is also less motivation (or greed depending on how you look at it) to excel in life.
Call it the successful result of pushing for common prosperity (共同富裕) or simply renouncing the lofty desires in life (看破红尘). Young people are increasingly comfortable with getting by doing the minimum. This is a generational paradigm shift that is taking place not only in China, but many parts of middle-class Asia as well.
The beliefs and values of those born before the 1980s have been mostly shaped by the need to have a good education in order to secure a well paying job. Having gone through the dot-com boom and bust, the Asian financial crisis, globalisation, etc, hard work has been taken to be the 'holy grail' for being successful - success in life being largely defined as having a high paying job, even at the expense of sacrificing personal time and working long hours. Hard work correlates to wealth, which buys a roof over the head and some financial stability.
And the results have been evident over the last 5-10 years as seen in higher income levels. Economists in Asia have previously also touted the emergence of Asia's middle class, in which the rising affluent population (especially the Chinese) were expected to spend more on lifestyle and luxury.
In a recent weekend coffee catch up with a friend, he mentioned an interesting observation: Setting aside the affordability of buying a home, it is actually a lot easier for young people today to get by. In Japan, Korea and China for example, there are tons of convenience stores for getting decent hot food and supplies. There are shops like Uniqlo and MUJI for clothes, and "dollar stores" such as Daiso and JHC for incredibly cheap household stuff. If you are willing to forgo the luxurious brands, you technically don't have to dig very deep into your wallet to live comfortably.
It is actually very easy for people to 躺平 and give up on the ”high life".
From a capitalism point of view, this is obviously bad for the country because growth has traditionally been associated with increased spending, and not about being contented with living the simple life. And while US and the rest of the world are hiking rates to fight inflation, China by contrast is doing the opposite. By cutting domestic rates, the Chinese government is probably adopting the age-old "inflation targeting" monetary policy to rejuvenate economic growth and avoid stagflation.
A new new normal.
The narrative on the outcome of China's recent party congress meeting is obviously extremely divided, you either love it or hate it. Some of the peers I spoke with see XJP's next 10-year rule as an iron-fisted style of governance. While it might appear as if too much power is in the hands of one person, this continuity also implies a certain stability in policies, which can be a good thing in today's volatile markets. The so-called 'strong fisted' ruling also means that privately owned enterprises who work more closely with state-owned-enterprises could be seen as a more 'friendly' party aligned with national policies under the current regime.
"I believe China is currently in the range of 3 to 5 percent growth, and headed rapidly to zero" - excerpt from Politico.com, January 2016
In 2016, when the term "new normal" was first introduced at China's 13th Five Year plan, there were several opinions hinting that one of the world's largest economic engine was rapidly grinding to a halt, including the possibility of a catastrophic outcome.
But an article published in Fortune put this into perspective: "The slower growth rate is a sign that China’s enormous economy has passed the startup stage and is beginning to mature. While this is certainly a new environment for investors to wrap their hands around, it doesn’t equate to economic Armageddon." China and most of the global economy continued to thrive in the three years that followed, right up to the pandemic in early 2020 which took the whole world down.
What doesn't kill you makes you stronger.
Maybe that could also be what the world needs right now: To be less pessimistic and gradually learn to embrace a second new normal of a controlled (or regulated) market economy rather than a free market economy that is jacked up on steroids.
HKIA isn't what it used to be in the old days.
No crowds. Only a handful of shops open. Lounges are dead. HKIA used to be a humdrum of travelers, both business and leisure. I used to look forward to the lounges (the Cathay ones especially) as they usually served free flow warm food, drinks, snacks, etc. The Pier at HKIA was a favourite go-to for its refreshing hot showers and Aesop scented shampoo and body wash. After that, I would settle into a bowl of hot wanton noodles from the noodle bar, extra serving of chilli, paired with either champagne or a can of Asahi. At times I would have someone from the dessert counter give me a scoop of vanilla ice-cream, then head over to the coffee bar and ask for a double shot espresso and pour it over to make an affogato. Then I would either get to work on my laptop at the bar area or just get some shut-eye on the couch. I could spend an entire day in transit at HKIA - and people would think I am crazy. Occasionally, I would even travel out of the airport into the city to meet with friends. Macau was also accessible straight from HKIA via a one-hour or so ferry ride. This was the Hong Kong that I was familiar with, at least from the perspective of an airport commuter.
So you can understand why I was slightly sad and somewhat disappointed when I saw the nearly empty aisles along the departure gates at HK airport. Aside from the crowd, nothing much about the facade has changed except for some additional seating areas with charging points.
The city struggles having to deal with conforming to mainland policies (which is totally understandable), but at the same time, facing pressure to open up like the rest of the world, especially Singapore, its closest competitor. It is not an easy task. Every month, business and investor confidence in the city is diminishing. Whether it relates to the perceived lack of freedom, uncertainty around propaganda from Beijing or the draw of spacious living, companies can always find a reason to jettison Hong Kong for Singapore.
It is odd for me, speaking as a Singaporean but I actually am rooting for Hong Kong, in a healthy competitive way.
Hong Kong is probably the last frontier for China's position as an international gateway. Despite its current sovereign ownership, it's colonial legacy and history is what gives Hong Kong its uniqueness - the ability to harness the vast potential of the Chinese market and combine this with the best (or widely accepted) practices of the West. And if you think about it, this is actually very similar to Singapore.
Singapore surely has Southeast Asia as its playground, but Southeast Asia as a market dims in size significantly to China. Its diversity of language and cultures, unlike China, makes it more difficult to penetrate and navigate the ground. As big as China is, its socialist-driven economy incorporating standardization and uniformity is probably one of its biggest selling points. For example, you could hire a Chinese-speaking person, parachute him/her anywhere in China, and can be assured that he/she will be able to navigate the ground with relative ease.
But you can't do the same with Southeast Asia. To master the Indonesian market you need a native from Indonesia who understands not only the language but the customs. Likewise for Vietnam, the Philippines and Thailand. The ASEAN bloc as a whole works well together because we collectively thrive on regional common interests. But to succeed in each market independently, we need to dedicate resources specific to each country. Besides, to win in Southeast Asia, you can't afford to focus just on one country. Even the biggest and most successful startups in the region have expanded their footprint beyond their home country. After Indonesia, GoTo has set its sights on Singapore, Malaysia and the Philippines. Despite making a name of itself in Malaysia, Grab has expanded into other key markets such as Singapore, Indonesia and Vietnam. Yet, even as successful as these startups go, Southeast Asia as a region still falls behind significantly in size to China. Over one billion people in China over the last few decades have been reading more, spending more, investing more, and consuming more. And in recent years, the flurry of venture capital and private equity money into Southeast Asia, lifting overall valuations, has just made it increasingly difficult to find a rich exit in a crowded market.
Everyone is waiting eagerly for COVID restrictions in China to open up and for trade flows to resume. Guess which city will be the biggest beneficiary of that? It is perhaps simply just all a matter of time.
Make Hong Kong great again.
Our lack of understanding in how different countries are being governed are rooted in bias, largely based on what we are familiar with and what we are not.
Earlier this year in Singapore, I was having a conversation with someone from a bank about the creditworthiness of large state-owned-entities in China. Surprisingly, he actually saw this as a “high risk” business. If the counter-party had been one of the more familiar titans of the finance industry, that sentiment would have been very different.
Apparently many still think that the business environment in China is still rampant with corruption and fraud. These same risks that investors are concerned about exist in many other countries as well, including the developed ones. Just take a look at 1MDB, Wirecard and Theranos.
I recall a company sergeant major during my national service days who once said,
“Soldiers all around the world behave in the same way once they put on their helmets and the uniform.”
It’s surprisingly true. The helmet is one equipment that reminds everyone that: at the very core, we are all the same. In a similar fashion, a blue-collared production line worker sitting in China, Philippines, Italy, the US or anywhere else in the world operates, say a machine, in more or less the same way. Because he is human, he experiences both good days and bad days. And on bad days, the quality of his work might be sub-standard. But at the end of every work day, he tries to get off punctually, goes back to his family, and starts his routine again the next day. You might attribute any quality defects to the fact that the product was manufactured in a relatively low cost location i.e. if something is lousy, it is easy to dismiss that it is cheap and “made in XXX”. After all we have been conditioned to conveniently draw trivial correlations between price and quality. Without this bias otherwise, you could have just as easily blamed it on the merchant who sold you the product.
But corruption, fraud and quality control are smaller problems in the bigger context of things these days---Earlier this year, JPMorgan allegedly issued an “un-investable” call on China equities as a reflection of its unpredictability and geopolitical risks.
All businesses need to embrace policy. Companies that end up on the wrong side of propaganda run the risk of getting cancelled, as can be seen from H&M’s business in China.
But being cancelled goes against our ideologies and learnings of the free market, which is: identifying an environment with favourable supply-demand dynamics and taking scientifically calculated risks in raising capital to make money. State intervention is non-existent.
For most places in the world, the market economy is the truth. In China, the authority is the truth. There’s no right or wrong. Most of us have simply been brought up imbued with the ideologies of an open economy that we become averse to a scenario in which autocratic intervention could make or break a business.
We fear what we do not know or what we cannot control. And because of this, many companies write this off or cast a huge premium on country risk.
Think for a moment how different the risk models and perceptions towards raising money (such as the weighted average cost of capital) would be for a domestic investor or owner of a Chinese company vs a foreign company. The assumptions driving the decision to invest should ideally be localized and go beyond the scientific calculations that we have been taught. Instead we consistently fall back on conventional wisdom (which are mostly capitalist-centered) defining what constitutes a 'mature' or 'stable' market return.
For example, a common risk management strategy in the West involves diversification i.e. as long as we have enough eggs in the basket, we can always afford a few bad ones. In China, risk management is less of a game involving statistics but more about developing, embracing the ecosystem, staying in alignment with policies, and in the process, minimising (or sometimes even zero-rizing) the incidence of 'bad eggs'. This is inherently a very different way of doing business and ultimately a very different perspective of risk. In a slightly similar parallel, while modern Western medicine adopts a targeted approach towards treating afflictions and eliminating the ‘bad parts’, Chinese medicine tends to be more holistic, treating the entire system, including the patterns of symptoms.
Because the fundamental perceptions and understanding of risks are different, many investors struggle with using scientific methods to quantify returns.
Shan Weijian summarized this aptly in an interview last year:
"Investment is a risky business, and China as a market, is not for the faint-hearted."
On closer look, most of the policies are probably not meant to be autocratic or unreasonable. They exist to maintain a certain social stability, encourage economic activity and safeguard certain national interests - as with any sovereign state.
Of course the whole inner workings of global trade are made up of many complex moving parts. But at the end of the day, these are just the rules of the game, and risk is just a measure of how well you think you can play that game.
Starting a business in the US almost seems like fortune favours the bold. In China it probably feels more like: You better do as you are told.
A very different image of entrepreneurship and doing business is portrayed in the West. Many of these are frequently sensationalised with stories of school dropouts creating billion dollar businesses, founders working out of a garage, cavalier businessmen who buck the trend, sidelining authority to grab resources on a level playing field, and numerous books celebrating corporate bravery.
My first-hand experience in understanding this difference was about 18 years ago when I embarked on the NUS Overseas College program in Shanghai. The idea of the program then was to replicate in China, the “success stories” of entrepreneurship in the US - championing research & innovation and commercialising it. China at that point of time was less interested in leading the charge on technology and chose to prioritise large scale infrastructure investment and market reforms around reining in foreign investment. Some of the best businesses at that time weren’t centred around tech but the seemingly more boring and less sexy sectors. It was a very different economy and no one in the cohort had the slightest clue of how to adapt the program objectives to such a market. We were all learning along the way (摸着石头过河) from attending business meetings, fraternizing with colleagues, all the way down to getting visas and negotiating the rent on the apartment.
We would later on also learn that the strategy of navigating in China (which probably still applies today), wasn’t so much about being the smartest guy in the room but more about handshakes and being able to connect the dots.
Ideas and intelligence are nothing without endorsement.
As such, individuals and high achievers who are used to thriving in a merit-based world and expect to use their minds to blow everyone off their seats will often find themselves stumbling in such an environment.
Also, all the most important decisions are made centrally. There is almost always either a single decision maker or a small trusted circle of influence (almost mirroring the CCP style of governing) or if you like, using different share classes in a more western centric context.
Language is culture and culture is language. Being effectively bilingual might be sufficient, but being able to speak the language does not automatically imply that you can assimilate into the culture. As with many cultures, there are almost always subtle undertones in both casual and professional banter between people, which is why as effective as Zoom and video meetings go, nothing can truly replace the relationships built with in-person meetings.
Most of us would later on in our jobs apply these valuable learnings when we took on regional roles or help overseas and local companies in their expansion within China. Starting and running a business wasn’t the same as how most of the world saw it being done in the case of Facebook, Google, Apple or Amazon. The venture capital ecosystem in China didn’t really take off until maybe 10 years ago and the check sizes weren’t that large as well. Most of the time, it takes years for a company to grow, often staying in plain sight, having the right handshakes, playing by the rules of the game, and perhaps more importantly, having very very deep pockets.
Even as you are reading this, the geopolitical and macroeconomic landscape is constantly evolving, and we are still learning. There is certainly much more transparency today as compared to before, but the perspective of risk will continue to be an evolving and ongoing education process, and many investors and corporates seeking to do business in one of the largest economic powerhouses in the world will eventually need to find a way to balance expectations and reality.