Why Should US Investors Worry About China’s Economy?

Who would have thought decades ago that China would become the world’s manufacturing powerhouse? Anyone who invested in the Chinese company Alibaba near the start of 2016 for $60 a share made a five-fold profit by October of 2020 when the share price hit $309. Many other investments in Chinese stocks gathered similar profits. Then the effects of Covid-19, security concerns in the West, a real estate bubble, and excessive debt have dragged the Chinese economy down. Unemployment in the 16-24 year-old age group now runs about 25% as college graduates are not finding jobs. As noted with Alibaba whose share price is down to $94 a share, investment in China has not done so well of late. But why else should US investors worry about China’s economy?

The World Relies on Big Economies

The US, EU, and China function as engines of growth for the rest of world. Countries that rely on raw material exports for their foreign exchange need buyers. Smaller but technically savvy nations like Taiwan, South Korea, and even Japan rely on more populous industrialized nations for much of their exports. When China reduces imports of raw materials the effects are felt by big countries like Brazil and smaller nations like Mozambique and the Solomon Islands. Slowing Chinese industrial production reduces their technical and raw material imports and a slowing internal economy slows their import of finished goods from everywhere in the world. The bottom line is that when China slows down it slows down the world as well. The world economic outlook projected by the IMF sees the global economy slowing by half a percent over the coming year.

How Much US Corporate Revenue Comes From China?

There were two dreams of many US companies early in China’s rise. One was to manufacture things in China for less than at home and sell to the world for a higher profit. The other was to sell to the huge and steadily more affluent Chinese market. The companies that had the highest revenue exposure and made the most corporate profits out of China were these as of August 2020.

  • Wynn Casinos, 75% of revenue
  • Qualcomm, 66% of revenue
  • Micron Technology, 57% of revenue
  • Broadcom, 50% of revenue
  • Texas Instruments, 44% of revenue
  • IPG Photonics, 43% of revenue
  • AMD, 39% of revenue
  • Veco Instruments, 35% of revenue
  • Maxim Integrated Products, 34% revenue

Intel gets 26% of its revenue from China, Nvidia gets 23%, and Apple gets 17%. Boeing, Caterpillar, GM, Starbucks, Nike, and Ford all gain a significant portion of their revenue from sales in China but all hover around 10% and some, like GM, are seeing their income from China decrease.

The point is that a slowing Chinese economy will hurt folks who do business there from casinos to chip makers who supply for smartphones made in China to folks who make and/or sell their products there. The situation with the Chinese economy is compounded by the decision by the US and its allies to quit exporting the highest end chip and technology to China due to national defense concerns.

Investing in China for Non-Chinese Is Not Such a Good Idea Anymore

Bloomberg published an article about how directly investing in China is getting harder and harder. Bit by bit China has been denying information about its economy to outsiders, even to those headquartered in Hong Kong! Information as mundane as official statistical yearbooks, patents, and corporate registration are not available to anyone outside of the mainland. A recent feature of this shutdown is that a data platform from Shanghai, Wind Information Co., is not renewing subscriptions to outsiders. Doing business in China and investing in China have always been a bit risky due to doctored information coming out of the central government. But people have generally been able to get around that by going back to the original data. Now that has become much harder. The point, according to Bloomberg, is that you need no longer bother doing business in China unless you are mainland Chinese.

As China’s economic issue worsen they will take more and more steps to hide that news not only from foreigners but from their own population. Of course, it will be hard to hide the fact that so many youth are unemployed from a 21-year-old college graduate who cannot find a job. But that is China’s problem. The issue for a US investor will be to look elsewhere for investment opportunities as tensions with China mount and their economy stagnates.

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