April 2022 has been a dark month for China, with 26 million people locked down in Shanghai and COVID cases rising pretty much in every major city. Government’s zero-covid control, while effective and warranted in 2020 at the beginning of pandemic, is now both out-of-date and in-effective with the current Omicron variant. The decision of lockdown and how the lockdown has been handled in Shanghai exposes serious flaws in the Chinese system – including the faulty decision-making process, the inefficiency and corruption of planned economy, the inadequate public health system, and the danger of single-mindedness. China’s 2022 economic growth will be severely impacted by drop in consumer spending and in exports. The 5% drop of Shanghai A share today reflects the dark mood of investor sentiment.
I have been lucky as I live on a nice golf-community in Shanghai built by a Canadian entrepreneur decades ago at the edge of Shanghai, near the sea. It is truly an oasis with the sun setting over the lush golf course providing serenity and peace. The top-of-mind question during my daily walks on the course is: “is China still investable?”
Sunset on Links Golf Course, Shanghai, April 2022
Certainly, China is less investable than before as the era of wide-and-hot growth is gone, regulatory tightening is real, supply chain disruption is wide-spread, consumer confidence is down, and an opening of the country is not yet in sight.
But all politicians need and want economic growth, economic pragmatism eventually should return to China. When that happens, there will be a silver lining for some:
- Weak companies will not survive. Surviving companies will have less competition and stronger positions with their customers.
- Regulatory tightening that has impacted internet companies and education sectors have already largely played out in 2021. Support for hard-tech companies has not changed and will become even stronger.
- Cooling of labor market reduces operation costs for companies
- Cooling of stock market is making valuation more reasonable for VC or PE investments
So, we would say yes, China is still investable, but with caveats. The type of companies that are still investable are those that are:
- In sectors that the government wants to support – companies with advanced technology
- Strong companies that will emerge even stronger – companies that their customers cannot live without
- Companies that are non-labor-intensive, resilient in supply chain, flexible in workforce
- Companies with strong leadership at the top – a strong captain is critical in navigating a stormy sea, whereas anyone can sail in smooth waters
In our quarterly call with our portfolio companies, our single advice to our portfolio companies is “survive, build and thrive”. We are encouraging our companies to use this time to strengthen internal management, improve remote-working efficiency, move processes and customer-service on-line, build a more resilient supply chain and strengthen team.