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November 11, 2023
Headlines:
- Another Look, China’s Economy
- South America, Do Not Ignore
- Google and Meta Lawsuits
- The SEC and Hacking
- Video Repeat: Middle East Security
From the Publisher: “Corporate Middle East Response” We do not poll our viewers and readers to track responses and opinions to our commentaries. However, we do reach out to the individuals most engaged with our activities. Our suggestions regarding your company’s position on the Middle East Crisis being one of corporate neutrality seems to be well supported. That said, your company should absolutely describe it as a tragic humanitarian crisis, while hoping that safe passage out of the war zone will be provided. A corporate contribution to a neutral nonprofit was also supported as appropriate action.
Reassessing Doing Business in China It is safe to assume that the economy of China is slowing down. Data from Beijing may well be inflated on the upside and minimized on the downside, but it still shows a trend, which is unattractive to investors of all types. We follow the data, but we also do something clearly unscientific. We read related articles from various sources, some political, some business, and some self-serving and dramatic. A single data point won’t always be 100% accurate but can be useful if it is consistent. Obviously, quality sources are rated higher than others.
The noise from China, economic and political is not positive. To be specific, the Wall Street Journal discussed that corporations, many of them American, are pulling billions out of China essentially all their profits. We presume both past and current.
This action has pushed direct third quarter foreign investment in China into the red for the first time in a quarter of a century. Looking at this another way, foreign firms pulled more than $160 billion in total earnings from China during 6 consecutive quarters through the end of September. In comparison, in 2021 firms reinvested a net of $170 billion in China rather than transfer it abroad.
Obviously, this outflow of cash has an impact on China’s banking system and sends a negative message to their stock market. At the same time, their labor force is in transition with a significant component reaching retirement age and younger workers unable to find satisfactory employment.
Ed Note: The reasons are many and diverse, but certainly well worthwhile discussing. Interest rates in the West are higher while China has been cutting theirs. By China’s own admission, the country is overbuilt from a residential real estate perspective. Much of that construction was financed by regional banking institutions. They are, in turn guaranteed by Beijing. Consumer spending especially by wealthier individuals has slowed down.
Macro issues have also played a significant role. During the pandemic, many global companies adjusted their supply chains and exposure to Chinese vendors and moved elsewhere. The government under Pres. Xi has tightened its oversight of foreign firms currently operating in China along with those considering investment. In some cases, this is based on the broadening of its anti-spying laws that could restrict basic corporate activities. Recent investigations and intrusions on Bain and The Mintz Group would be examples. The potential conflict between China and Taiwan is an ongoing negative factor. All these factors increase the China risk plan of any global company. Combined with often attractive alternatives, the result is reducing investment and reducing risk in China. At the board and senior executive level, a broad spectrum of data and information must be followed, analyzed, and factored into your global business plans. China remains the world’s second-largest economy, and one not to be ignored.
South of the Border Most of us, for a variety of reasons, do not closely follow the economies of South American countries. The larger countries, such as Argentina, cannot be ignored because of the size of its population and its economy. Argentina is currently facing an economic crisis with the cost of certain consumer products accelerating at double-digit inflation. At the same time, many companies in Argentina cannot import supplies because of dollar shortages. For example, General Motors suspended production for 3 weeks in October. Restrictions on the purchase of gasoline is commonplace and related inflation is expected to reach 200% by year’s end. Certain interest rates are approaching 130%. Argentina owes $44 billion to the International Monetary Fund. The government is expanding the printing of money and borrowing billions from China. Both are unattractive courses of action. Presidential elections will be decided in early December. One candidate is the economic minister, Sergio Massa of the ruling Peronist coalition. He is challenged by Javier Milei, a libertarian outsider.
Ed Note: This situation is not to be ignored basically because it is a large South American country. It is a significant agricultural exporter along with being a supplier of lithium and natural gas. Not surprisingly, China has been a significant lender which may not continue at the same level, but China will undoubtedly have appropriate collateral. A look at your company’s South American exposure may be timely and appropriate.
You Should Know In Bangladesh, factory owners are being pressured by their garment workers to increase wages. Currently, these workers are some of the lowest paid in the world. Although working conditions, because of some international oversights, have improved relative to safety, wages have not. Bangladesh is a significant supplier/manufacturer of low-end clothing to a multitude of global retailers. From a macroeconomic standpoint, Bangladesh represents the consumer mentality: “I care about foreign working conditions, but I certainly do not want to pay more for my wardrobe.”
TicTok copies Amazon The highly popular viral video sharing platform, which is Chinese owned, has decided to capitalize on its huge streaming audience. The plan is to compete directly with Amazon in online retail known as social commerce. TicTok intends to set up a network of warehouses and fulfillment operations managing inventory and delivery from numerous independent merchants selling to TicTok’s followers. Amazon does this, but also utilizes third-party sellers to handle their own fulfillment. Target and Walmart have related e-commerce sites. TikTok’s ownership by the Chinese may present some US national security issues.
Bloomberg reported that debt held by those younger than 50 years old as a share of all US consumer borrowing increased by the most on record in the third quarter according to the Federal Reserve. Consumers under the age of 50 now hold 55% of all US household debt. That is compared with almost 48% in the second quarter, a 7-percentage point surge. The change appears to have been largely driven by mortgage, credit card, and student loan balances. The most indebted households are those between the ages of 40 and 50, while those in their thirties and those in their fifties hold roughly equal amounts of debt.
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