Xi Jinping’s China is bouncing back and making overtures to western business. While breathing new life into multinationals’ top lines, it is also bringing a fresh quandary: whether to invest in the world’s second-largest economy as geopolitical tensions over the fate of Taiwan intensify.
Since Beijing ditched all Covid-19 restrictions in December, pent-up demand in the retail sector has fuelled a faster than expected recovery. China’s 4.5 per cent economic expansion in the first quarter has made its way into western brands’ earnings, especially at the top end of the consumer spectrum.
Take Porsche, which reported a record 18 per cent jump in sales driven by China, the German luxury car maker’s largest market. Or LVMH, similarly boosted by buoyancy in the world’s biggest luxury goods market, which the French group said had driven a 17 per cent surge in first-quarter sales just as growth plateaued in the US. Meanwhile, its Paris-based rival Hermès hailed “a very good Chinese new year” as it revealed a 23 per cent jump in revenue across Asia. In these higher spheres, consumers can be charged 30 per cent more for luxury goods in China than in Europe, according to Morgan Stanley.
But there is an “elephant in the room”, as UniCredit economist Erik Nielsen noted in a post-IMF spring meetings briefing: rising geopolitical tensions between China and the west are bringing “the most profound change in a generation in economic policy thinking, and policy priorities”.
“In the US,” he wrote, “it’s all about containing China. In Europe, it’s partly a softer version of the same. This means that if (or when?) US-China relations deteriorate further in this tit-for-tat, leading to further protectionist measures including export bans and sanctions, European businesses will most likely be caught between the two parties.”
Sven Behrendt, a partner at Berlin Global Advisors, said the corporate world is in a strange moment “when post-pandemic hedonism meets geopolitical risk.”
Companies have grown aware of this risk since former US president Donald Trump imposed a slew of economic sanctions on Chinese companies, marking a more confrontational shift towards Beijing that has continued under his Democratic successor Joe Biden. For supply chains this stance, coupled with huge trade disruptions during the Covid pandemic, has prompted companies to ditch the notion of “just in time” for “just in case” — with groups from Intel to Apple revisiting their reliance on China and trying to move parts of their production elsewhere, to countries such as India and Vietnam.
But such is the interdependence with China built over the past two decades that this is no easy task, as shown by Apple’s difficulties in India. And if there is one lesson from the much smaller uncoupling between Russia and the west following the invasion of Ukraine, it is that the process is painful for western brands, and entered only reluctantly.
China’s economic recovery will only make these plans to diversify supply chains harder to implement, especially for publicly listed groups. With increasing pressure from shareholders, and pay incentives tied to share price performance, the temptation will be greater to play down the geopolitical risks or ignore them (a US general recently predicted that Washington and Beijing would probably go to war over Taiwan in 2025).
Sure enough, German carmaker Volkswagen, which owns Porsche, this week announced a plan to invest €1bn to build an innovation centre in China. This came after a decision last year to spend €2.4bn on a venture with Chinese chip designer Horizon Robotics. Not exactly a sign of prudence regarding a country that an increasing number of policymakers consider the biggest threat to the west.
