Companies doing business in China were given a nasty surprise when their earnings got hit as a result of Beijing’s nearly three years of extensive lockdowns followed by a sudden reopening in early December 2022.
The Epoch Times reported on Feb. 5 that with many places in China seeing 80 percent infection rates within 20 days, the decision had a massive effect on factory and business operations. Companies like Apple continue to exit China to relocate their supply chains.
Caught in the turmoil is luxury apparel maker Canada Goose. Its third-quarter earnings missed badly and its stock price fell 15 percent on Feb. 2.
While Canada Goose remains positive on its prospects in China, its chairman and CEO Dani Reiss said during the company’s earnings call that he did not anticipate the sudden reopening in early December.
“This led to a surge in infections, which had a significant impact on our business during what is typically our most productive trading month. Consumer traffic decreased dramatically and staffing levels were impacted due to illness,” he said.
China’s handling of COVID has hurt the earnings of many large multinationals, including Apple, Starbucks, Alphabet (Google), and Amazon.
Risky Business
Doing business in China includes dealing with Beijing’s abrupt and opaque moves. In 2021, Beijing took steps to limit foreign investment in its tech companies like Tencent and Meituan. Analysts said at the time that investing in China needs reevaluation.
The Ontario Teachers’ Pension Plan (OTPP) is Canada’s third-largest pension fund, with $242.5 billion in assets. In a Jan. 31 statement, the pension fund said it currently has about $5 billion, or 2 percent, of its net investments in China and that it has paused direct investments in private Chinese companies.
The OTPP told The Epoch Times by email on Feb. 3 that the pause only applies to direct private investments and that the fund will continue to invest in China through publicly listed securities and in public and private assets via its fund partners.
Reuters cited a source who said the move was due to geopolitical risks among other factors.
China has fallen in strategic priority in the minds of Canadian business leaders. The 2020–21 Canada-China Business Survey, conducted in August and September 2021 by the Canada China Business Council (CCBC), found that only 21 percent of companies polled said China was a top global priority. This was down from 26 percent in 2019–20.
CCBC also reported that respondents said Canada-China and U.S.-China relations were the top two obstacles for doing business in the Chinese market, whereas compared to the 2019 survey, neither reason even made the list of top 15 concerns.
Canada’s relationship with China has now been strained for years, ever since the arrest of former Huawei CFO Meng Wenzhou in December 2018 and the detention of Michael Kovrig and Michael Spavor shortly thereafter.
Ottawa recently made moves to cut China out of its resource sector, most notably regarding investments in critical minerals.
Warning Signs for China Reopening Narrative
There is an expectation among some economists that China’s reopening from harsh COVID lockdowns will be a tailwind for the global economy in 2023. Other economists and China watchers feel differently.
China has lost the equivalent of 4.7 percent of gross domestic product as a result of the pandemic and its response, said Ben May, Oxford Economics’ director of global macro research.
He’s skeptical that the China reopening story will save the world from a recession, May added.
For companies selling products in China, the big question is the health of the Chinese consumer. In a Jan. 27 note, May said, “Consumer confidence is very weak and households are tightening their purse strings, so a major consumer splurge seems unlikely.”
China Beige Book managing director Shehzad Qazi said in an interview with Bloomberg on Jan. 17 that “the Chinese consumer is in a very terrible spot right now.”
He characterized the Chinese consumer as a conservative one.
“I think companies have to really seriously reevaluate and rethink their China strategies, both because again, you’re talking about an economy that is going to be slowing down into the future,” he said.
On Feb. 7, Canada Goose presented its five-year growth plan but made no mention of China, even as the company opened new stores there in 2022 and said sales rebounded strongly in January after the December disruption.
Questionable Numbers
While May has a less-than-rosy outlook on China, he told The Epoch Times that his analysis is purely focused on economics and thus he is not in a position to assess the potential impacts of likely COVID deaths relative to official numbers.
The Epoch Times reported on Feb. 1 that Beijing had only registered fewer than 80,000 in-hospital COVID deaths to date. But experts say this figure is significantly lower than the true death toll, pointing to the regime’s practice of hiding negative information and to widespread accounts of overwhelmed crematoriums and hospitals.
Canada put in place COVID restrictions for travellers from China, Hong Kong, and Macau effective Jan. 5 and has since extended these measures until April 5.
China expert Gordon Chang has slammed optimism about China’s economy. In an article for the U.S.-based Gatestone Institute think tank on Jan. 30, he wrote that “China’s economy is far sicker than analysts assume” and that the country won’t have a good year either in 2023 or 2024.
“Foreigners are going to lose money in China again,” he said.
