Impressions on the Re-opening

After 3 years, China has finally reopened its doors to foreign travelers. Alice Wang, manager of a Chinese and ex-Japanese equity strategy at Quaero Capital, has just returned from a 3-week trip to China. In the following text, she shares her impressions, sometimes anecdotal, based on numerous meetings and visits throughout the country.

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If there had been any flights to Shanghai directly I would have skipped Hong Kong entirely. In my mind, I had already imagined Hong Kong to be a ghost town – flushed of life and expats, of business and interest. So I was pleasantly surprised by 1000 attendees who swarmed the Goldman Sachs Conference, particularly for Kevin Rudd, former Australian Prime minister. That he was the main event of the week was a sign of obsession over geopolitics in Hong Kong – an obsession that was noticeably absent the moment I crossed over the border into China.

Priority number 1: relaunch economy

The first time I mentioned that the “balloon thing” was impacting the market sentiment, I was greeted with a blank stare. What balloon thing? Across the 7 cities I visited, across Tier 1 through Tier 6 [see note below], very few people, if any, had any idea about the “balloon thing.” So I realized, that while the Western media could not stop talking about this, the Chinese had no interest in stirring up geopolitical fears at a moment when the focus was the economy. Business people told me about how they had passed the worst, people in hospitality and F&B told me about how they had made back 3 months of losses in the Chinese New Year re-opening rush, and a friend living in Shanghai, the worst affected by the lockdowns, gushed about the 20 new malls expected to open in the city that year. I met a hotel designer for an early lunch at 11am – by 11:30, there were already 10 tables waiting outside as the restaurant was entirely full. Someone in the export industry joked that if 2/3 of Shanghai residents were trying to get out of the country last fall – the number was probably like 1/3 now. People have short memories. For foreign investors, the lockdowns of last year may have been the equivalent of Tiananmen, but as the excitement of normality and travel returns, soon the lockdowns of the past year will be a distant disruption, particularly, I believe, if some of these outbound tourists travel to New York.

Post-COVID China

The outbound tourist to New York, now that the US has dropped all COVID restrictions, would be greeted by the stench of sewage on the streets, lattes that cost USD10, and a meal at an average restaurant that could cost upwards of USD100 a head – excluding tip. That tourist would likely forget that she needed cash – in China cash is no longer accepted in many places or accepted begrudgingly with a sigh of inconvenience. Most of all, that tourist would feel the oppressiveness of the constant media fearmongering about the imminent risk of war with China, the ambient risk of harassment on the subway or out on the streets of SoHo – I know this because I have been that tourist. That tourist would go back home and for the first time, perhaps, conclude that life in her Tier 2 city is more beautiful than life in the “Beautiful Country,” as America is known in Mandarin.

Her Tier 2 city would have changed a lot in the last 3 years, and likely for the better. Across the country, new commercial centers have sprung up, built to resemble traditional Chinese streets and palaces. They stick out like oases amongst the tall, hulking skyscrapers. In these centers, sometimes you catch a glimpse of an elegant young lady or man dressed not in Versace or Gucci, but traditional hanfu, gracefully walking past with an umbrella. In Tier 5 cities, governments have spent budgets on traditional Chinese stone gardens to improve quality of life, alongside upgrading the local infrastructure to improve efficiency – because even at 1mn people, ‘small’ Chinese cities can greatly increase productivity and lower greenhouse emissions through subway investments.

Luckin Coffee, which now operates more stores than Starbucks and focuses exclusively on delivery, has brought down the cost of a latte to under RMB 20 – and despite my lingering sour taste about this company it was now cheap enough that companies preferred to order Luckin Coffee than use their own espresso machines – so I had my fair share of Luckin Coffees on this trip. I can attest that their coconut milk latte, their number one best seller is both extremely innovative and very very good – I suppose I am still sore from the USD 10 I paid for a latte with oat milk in SoHo earlier last year. Maybe because living standards have deteriorated so much in the past two years, so the contrast with China was so drastic – maybe because my expectations were so low going in. But China has done something extremely admirable – something I have not experienced in all my travels to emerging markets. To be anything less than very wealthy in these countries is to live in sub-hygienic conditions, work brutal hours, and be living hand-to-mouth. To be middle class in China is to live a safe, clean, affordable life, and at the moment, filled with an emerging optimism.

Reasons for optimism

This is the China that Western investors have always complained that China was not – a China that is driven by organic, consumption growth. China has a clean slate today – devoid of any stimulus, any direct government transfers, emerging from the worst property slump ever in the history of the country. Firstly, the China consumer is finally ready to take the reins – not just in Tier-1 cities, but across the country. So we should not expect grand policy gestures, because the consumption-led recovery should lead to a private investment recovery (already commercial real estate investment is showing significant recovery). Secondly, local governments don’t have any money – without land sales, they are deprived of their income. It is the consumers that will have to stand on their own two feet – and if needed, policy will step in. To come full circle, that China is censoring the “balloon thing” is extremely positive – they are focused on the economy and the long term prosperity of the country. They do not want to get bullied into war either from external or domestic pressures. Their calculus today is to wait, to endure, because the worst thing they could do right now to threaten their path is to react – today, they can only lose. In their own words, time is on their side.

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Note: The Chinese city tier system (Chinese: 中国城市等级制) refers to an unofficial hierarchical classification of Chinese cities in the People’s Republic of China (PRC). There are no such official lists in the country, as the Chinese government does not publish or recognize any official definition or a list of cities included in the tier system. However, it is frequently referred to by various international media publications for purposes including commerce, transportation, tourism, education, among others. (Source: Wikipedia)