For a few hundred years, China has been the largest and most important in the world in several industries such as manufacturing. However, history has also shown that China managed to lose its position, partly because the country closed in on itself.
China’s response to the Covid-19 pandemic is precisely one where the country has cut itself off significantly from the outside world, combined with internal shutdowns in various cities and regions. Added to this is the strong backlash against China from the United States and the rest of the Western world, which together could create fears that China will completely shut down itself and its economy once again. .
The ongoing US trade war and outspoken rhetoric against China reinforces, in my view, China’s tendency to find its own global paths, which in these years bypass the West. I also have no doubt that it reinforces China’s emphasis on domestic economic growth. However, I view this force primarily as a global megatrend that becomes stronger in countries with the financial muscle to support domestic economic growth. So I don’t see history repeating itself in the form of a lockdown that would pave the way for China’s internal economic decline.
At the end of August, Chinese political leaders decided to take measures to stimulate growth in view of the major political events in October. These are classic initiatives, where 300 billion RMB has been allocated to a wide range of construction projects, from building renovation to highway construction. In addition, provinces are allowed to allocate RMB 200 billion to the energy and utility sector.
In China, it’s a safe bet to play and it will probably have a positive impact on GDP growth in three months. When it comes to this type of economic intervention, speed is not to be underestimated and this initiative has already been implemented in the first half of September.
These are the latest official steps to get growth back on track, but the Chinese economy contains far more vitality than fiscal impulses. In the manufacturing sector, where services weigh heavily, it is true that the PMI index has fallen over the past three months. However, it remains at 52.6, indicating a fairly good expansion in this part of the Chinese economy.
Some are open to this development, especially companies. It probably won’t come as much of a shock that the United States is Starbucks’ largest single market. However, I have a feeling many will be surprised if China becomes Starbucks’ largest single market by 2025. Starbucks currently has 6,000 stores in China but expects to have 9,000 in 2025, surpassing its own country of origin, the United States.
But like many other places in China, the coffee market is also different from many other places in the world. In the West, you can usually take a cup and enjoy it on the spot. In China, a fair share of the coffee is instead delivered to the customer. Starbucks has a partnership with a delivery service but also has access to 5,000 in-house delivery people. The only part of deliveries is to be doubled by 2025, and this is just one example of China’s economic vitality which I believe should not be underestimated.
There are many facets to the history of Starbucks in China as the company’s development in the country is not just about rocking coffee at the counter. For example, 1.46 billion RMB will be invested in a new technology innovation center so that it is not just a service economy with unskilled jobs that develops.
Absinthe in China is, as always, the huge price competition, which Starbucks also experiences. Sixteen percent of Starbucks stores are in China, but only 7 percent of the company’s global revenue comes from there. Covid-19 restrictions in China weigh down the comparison by a few percentage points.
Fierce competition makes it difficult for foreign companies to enter the Chinese market, forcing investors to turn to Chinese companies. It’s a challenge but as a macroeconomic benchmark, one can keep an eye on consumer confidence. It must reasonably show reasonable strength for China’s domestic economic turbo to really kick off next year. There are still too many consumers who have negative expectations. My opinion is that many consumers are too pessimistic about their outlook, but that doesn’t change the fact that this is the next hurdle that needs to be cleared for 2023 to be a good year for growth.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment adviser with over 30 years of experience and a powerful entrepreneur in investment and finance. Peter is an international columnist and speaker on topics relating to global financial markets.