How to predict the unpredictable: Doing business in China in 2022

To say that 2021 has been an eventful year for businesses in China would be an understatement. Apart from the ongoing consequences of the Covid-19 pandemic, a constant flow of regulatory changes from Beijing rocked countless industries from real estate to gaming, ecommerce, edtech and many more. Given the speed and seemingly arbitrary nature at which new laws have been introduced, it can be difficult to understand what is happening in China and what the future may look like.

Verdict has spoken to business executives and analysts focusing on China to discuss what the coming year may bring for the Middle Kingdom.

In 2022 two major national events will dominate the narrative — first, the Winter Olympics in Beijing in February. Then, after that global spectacle wraps up, the Chinese People’s Political Consultative Conference (CPPCC) will meet in March to start with preparations for the Chinese Communist Party’s (CCP) most important event in 2022: the 20th Congress in November.

The outcomes of that event will shape China not only over the next year but the next decade — perhaps even the decades — to come.

n 2021, news in China was dominated by a slew of regulatory changes aimed at curbing Big Tech’s power.

“China has allowed things to develop very fast. But now they’re balancing things out from a regulatory point of view, and they’re taking action on monopolies,” David Messenger, CEO at China-based fintech company LianLian, tells Verdict.

It all began in November of last year, when, at the last minute, the CCP torpedoed the hotly-anticipated initial public offering (IPO) of Ant Group, retail giant Alibaba’s financial arm.

Since then, hardly any big name in the Chinese tech industry has been spared government intervention. In May, Alibaba was slapped with a record-breaking US$2.8bn antitrust fine. Soon after, Tencent was probed by the Chinese government. Ride-hailing app Didi Chuxing experienced a disastrous New York IPO, which prompted countless firms to rethink their plans of going public in the US.

The saga goes on: In the summer, a ban on online private tutoring wiped out a multi-billion dollar industry almost overnight. In addition, the notion of “common prosperity” was introduced, which saw the likes of Alibaba and Tencent pledge significant sums of money to foster fairer economic growth in China.

Within just a year, Xi effectively changed corporate China.

At the end of 2022, the CCP will hold its 20th Party Congress, which in all likelihood, will see Xi Jinping re-elected as General Secretary for at least another five years. As a result, we can expect to see Xi more openly exercising the power he has accumulated over the past decade.

Going into 2022, large conglomerates and business moguls still need to be on their toes. GlobalData analyst Emilio Campa predicts that the property and banking sectors will be the new targets on Beijing’s watchlist.

Indeed, the ongoing crisis surrounding China’s most indebted real estate developer, Evergrande, has become a cause for concern among Chinese lawmakers. Earlier this year, Evergrande missed several foreign and domestic bond payments deadlines. Recently, the firm was officially labelled as a defaulter.

At the same time, another Chinese property developer, Kaisa Group, also defaulted on a US$400m offshore bond payment.

Arguably, these examples are but the tip of the iceberg in what could be a massive restructuring of China’s highly indebted real estate industry. Given the risk this poses to the country’s economic stability, it is likely that Xi and his team will go after property developers next.

Similarly, online brokerages like Futu Holdings and UP Fintech Holding, which offer offshore trading services to mainland clients, have also become recent targets in China’s clampdown campaign.

Nevertheless, early indicators show that in 2022 regulators may scale back on their aggressive crackdown strategy. In the latest economic plan revealed by the Politburo of the CCP, the keyword seemed to be stability.

The party stipulated that “actions should be taken to safeguard macroeconomic stability, keep major economic indicators within an appropriate range and maintain social stability to prepare for the Party’s 20th National Congress.”

The CCP further emphasised that economic plans for 2022 should prioritise stability and prudence, noting that China will “continue to adopt proactive fiscal policies and prudent monetary policies.”

The Chinese economy will likely experience its slowest growth rate in decades. In 2021, GDP growth was already far more modest than several years ago. In the third quarter, China’s economy grew by 4.9%, lower than analysts’ expectations.

GlobalData, the data analytics company, forecasts China’s real GDP to grow at an average annual rate of 7% between 2021 and 2023.

Maintaining stability and safeguarding economic expansion appears to be a logical and necessary goal to keep national spirits high.

“The Chinese government will support the companies that align with its priorities and will either shun or force other companies to realign,” says Campa.

This means that firms engaged in upstream high-tech sectors, such as semiconductors, artificial intelligence, quantum computing, robotics and similar industries, will continue to see support from the government.

In its latest move, China’s legislature is updating the country’s science and technology progress law to allow for more government spending on next-generation technologies.

Although it may become more difficult for foreign businesses to operate in China, the market remains one of the most lucrative in the world.

“Undoubtedly, China will be the biggest growth market for the next 20 years until India comes along, and India is in no way close to the growth prospects that China will exhibit,” GlobalData analyst Cyrus Mewawalla recently said in an interview with CNBC. “On the other hand, investing in almost any industry is a bit of a risk because the Chinese government has shown that it’s favouring social cohesion and social stability well above investors’ interests.”

One of the first problems is that, in a lot of cases, “the west doesn’t understand China,” argues Campa.

Messenger agrees, adding that one of the big challenges that companies face is not knowing how market regulation in China works.

“The process in China round regulations is fundamentally different. Even though I would argue that the goals of the regulators are actually very similar to the goals of the regulators in other countries.”

Traditionally, new industries in new sectors were given significant leeway to operate. They were given the freedom to test the waters and build up China’s infrastructure. That's how the likes of Alibaba and Tencent were able to grow exponentially over the past two decades.

“They allow a lot of grey areas. It’s not white, it’s not black. They observe and they let things develop. Once it develops, they will then take action. Everything in China happens at China speed,” says Messenger.

These regulatory grey areas can actually be an advantage for smaller companies. There are still many undeveloped industries where foreign businesses can find their niche in China, for instance, in areas of specialised fintech, says Messenger.

In addition, as these large tech companies are now being forced to play fair, it opens up the space for startups and venture capitalists to come in and expand into areas that these tech giants previously dominated, argues Campa.

The key, however, is to find local expertise.

“If you’re a foreign company, one of the key things is, you’ve got to find the right partner in China who actually is China-born and they know how this works,” emphasises Messenger.

Doing business in China has never been easy, and it will likely only become trickier henceforward. Data protection and areas that are deemed sensitive to national security will be the biggest hurdles.

“New regulations are really going to push companies to make sure they have the right data architecture so that data is stored and backed up in China. That is going to require some additional investment,” explains Messenger.

Companies have to keep their “eyes wide open”, he adds.

Then, of course, there is the risk of bad press resulting from doing business in China. More and more companies are being caught between the West and China over human rights issues, being forced to choose between capitulating to Beijing or facing a backlash from western consumers.

Western brands such as H&M, Nike, Burberry, and Converse, which have openly voiced concerns about human rights abuses against China’s Uyghur Muslim minority in the western Xinjiang region, were quickly boycotted on Chinese soil.

Successfully doing business in China increasingly means knowing how to navigate between the opposing positions held by Chinese and Western consumers. “Maybe that’s what I would recommend; really good PR,” says Campa.

The latest international conglomerate that had to learn this lesson the hard way was Intel. After it told suppliers to ensure that no products or labour was sourced in Xinjiang, Chinese consumers threatened to boycott the US chipmaker. Soon after, Intel posted a letter on its Chinese social media accounts apologising to the Chinese public and pointing out that it was required to avoid Xinjiang-sourced products by the US government. Chinese social-media users seemed unimpressed by this: and there will also have been those in the West who would suggest that whoever may need to apologise over Xinjiang, it isn't Intel.

To some degree, then, companies wanting to do business in China's huge markets will also need to consider what effect that may have on their business in other ones. Along with shifting regulations and the advent of "social responsibility" payments, this will make operations in China for 2022 at least as complicated as they have been in 2021.

Main image credit: d3sign / Getty Images