One of my bigger regrets from college is that I couldn't--because of scheduling and other conflicts--go on a six-week trip the business school was offering to China. This was back in 2007, when it was just becoming clear that China was going to be the world's Next Big Thing.
It took several years, but I finally managed to visit in 2012, as part of a work assignment with CNBC. I only had time to see Beijing, but that was plenty to take in. I was struck first and foremost by its sheer size; city blocks that made Washington D.C.'s look small by comparison. There were few places to stop to pick up food or coffee while on one of these long walks--obvious opportunity for Starbucks. And on a grimmer note, because of the air pollution, the lack of birds chirping or squirrels flitting about (and the number of dying trees) gave the whole place a bit of a morbid feel.
Still, I would have thought that by 2023, we'd all be looking back on China's dazzling development and discussing how its myriad problems had been resolved. Instead, the opposite is happening. China's failed rebound post-Covid has drawn back the curtain on its larger economic challenges; and the bottom line for many U.S. investors and businesses is that Chinese exposure--which powered returns for the past fifteen years--is turning into a liability.
Perhaps the most ominous headline in this direction is this week's report that Chinese officials have been banned from using Apple's iPhones (or other foreign devices) and bringing them into work. Apple shares dropped 4% on that news yesterday, and are down 3% again this morning as Bloomberg is now reporting that China could broaden that ban to state-owned enterprises--a huge employer--and other government-controlled agencies.
Piper Sandler warns that this is part of a larger trend, one that comes right as U.S. and Chinese officials are arguing back and forth over whether our two nations are "decoupling" or "de-risking" or doing nothing of the sort. Companies with high China exposure have been underperforming since early 2022, the firm notes. Starbucks shares, for instance, traded as high as $125 in mid-2021, and are now at just $95, having dropped 4% this year.
The tech sector actually has the largest sales exposure, with roughly 15% coming from China, compared with about 7.5% for the S&P 500 overall. And the part of the industry with the highest exposure are semiconductors, which get "a whopping 30+% share of their sales from China," as Piper notes. Shares of Micron, for instance, even after a huge runup this year, are still trading more than 30% below their January 2022 highs. In May, the company was banned by China from having its products used in "vital infrastructure projects."
Other particularly vulnerable industries include autos, with Tesla's high China exposure driving the industry average above 20% for sales to China, and Tesla shares are still 40% below their late 2021 highs. Autos are also one of the industries China is leaning hard on to drive their global exports, as their BYD has become the world's biggest electric car maker.
Plus, certain luxury retail brands and a myriad of other industries from pharma to energy face trouble if their China exposure turns from a blessing to a curse. The billion-dollar question is whether they should double-down on their existing exposure and even invest to grow their presence there, or not.
One major warning about doing so comes from China Beige Book and AEI analyst Derek Scissors. China is not "suddenly" doing poorly, he wrote last month; its economy "has been off course for at least 14 years and continues to slowly grind to a halt." In short, "Policy is stagnant, the debt burden is rising, and demographics are starting to bite," he wrote, adding that there is little hope that government stimulus can overcome that.
Add to that the risk of a Chinese invasion of Taiwan--which President Xi has told his military leadership to be ready for by 2027--and it's hard to imagine multinational companies wanting to make bigger long-term bets on China right now. It's amazing how we've seen the emergence, rise, and potentially decline of China all playing out in just the past sixteen years or so.
See you at 1 p.m!
Kelly
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