Wenting Shen usually travels to China annually as part of her job as an analyst and portfolio manager at investment company Harding Loevner, but the country’s strict “COVID Zero” policies and this year’s Winter Olympics in Beijing made it almost impossible to book a flight.
Finally, she found one ticket available “and I just jumped on it.” What followed was a journey through a labyrinth of restrictions that included two separate 14-day periods of isolation in hotel rooms before she was able to get out and visit the companies she covers.
Shen joined the “What Goes Up” podcast to discuss the adventure and share what she’s learned about how China’s economy and corporations have changed because of COVID-19 and the trade war. Below are condensed and lightly edited highlights of the conversation.
Question: So you’ve finally been able to get out and move about the country a little bit. Are you able to visit the companies you cover and invest in?
Answer: Yes, it’s pretty amazing that I’m finding my way around cities. So I have been to six cities at this point, where our companies are based, and it’s pretty amazing that the companies are taking the risks by accepting my meeting requests. But wherever I go, I just find overwhelming hospitality from people — to not only see me in real life, to see each other in real life — but also looking to find out from me what is happening out there and what kind of impressions have shifted around China out there.
Q: Can you tell us about some of the companies you visited and what you’re learning about the economy during “COVID Zero”?
A: So one interesting observation that I saw during the pandemic, actually probably dating from a couple of years ago, was this entire rise of local companies, not only in consumer brands, but also in manufacturing spaces. So I have been seeing some companies during this visit that are replacing global suppliers, if you will. They are expanding their market share, the companies have invested in R&D much higher than other spaces, and they have closed that gap with their global peers, if you will.
So companies making inverters and server motors, for example, a company called Inovance, which is based in Shenzhen. And also a company called Shuanghuan, making precision gears in Hangzhou, which is another city that I visited.
Q: So they’re getting more domestic business. I guess is that just a function of COVID having made it much more difficult to sort of import and export equipment, that they’re actually supplying domestic Chinese companies more than they used to?
A: Yeah, there is definitely that element to it. But I would also say even dating to 2018, the trade wars, some companies suddenly realized that there’s this supply-chain safety concern. Some components might not be available to them some day. So they have started this contingency planning process and scrambling to find out what local suppliers could there be. So they started this process and this helped these local companies to really climb up that learning curve by having these relationships and manufacturing at larger scales, and that helped their capability to move up over the last few years.
Q: And what sort of level are they operating at? Are most companies in manufacturing back to 100% or is the pandemic still keeping them at somewhere below 100% of their former capacity?
A: Some companies are really feeling the pinch from the pandemic, the logistics pains. And while other companies located in cities which are better managed, for example Shenzhen, which is very close to Hong Kong, actually they are feeling less pain than those other companies based in Shanghai. So I think Shenzhen is better managed because of its rolling testing policies, which basically requires people to produce a COVID test voluntarily every 48 to 72 hours. So when I was in Shenzhen, I was even a little tighter on myself and asked myself to get a test every day. So I got a test when the lines are smaller, but it still takes like, you know, 40 minutes to an hour every day for me to get those tests. But under zero-COVID, I think that is the least invasive way to maintain that daily life.
Q: So when you speak to the management, I’m assuming you speak to sort of the CFO-type level and that type of person, what is their mood? I’m assuming everyone’s kind of tired of all the COVID prevention measures? Are they ready to reopen? Is there an eagerness to be done with this and sort of get past “COVID Zero” or do they appreciate this effort to contain the virus?
A. First, I think everybody is excited to see people in person, so they were excited to see me. And yes, I think that the companies are looking for some sort of certainty policy-wise, for sure. So they would like to be able to get a timeline, they’re hoping to have some clearer idea about how the policies will be going forward so that they can know, for example, whether they should diversify their capacity to Vietnam, for example. And then they can plan that for the next few months and they can allocate that capital. People are definitely looking for some clarity.
Q: And I’m curious about the consumer companies that you cover and invest in. Obviously, my impression is that consumer spending must be very much curtailed in some ways, not in others. I’m sure there’s still people getting takeout food and that sort of thing, but how has the consumer economy been changed during “COVID Zero”? And are any of the companies you cover sort of struggling to deal with that and adapt?
A: Yes. We definitely see some impact in the last couple of months. At the end of March, Shanghai entered this big lockdown, and that’s a big economic hub and a big part of a lot of consumer companies’ revenues. And, you know, April and May were worse. But I think that, again, a very consistent trend that I’m observing is that consumer spending, where it is going higher is spending on these local brands.
For example, these local sportswear brands, cosmetic brands, even infant-milk formula brands, which is known to have had some quality concerns. People used to always prefer multinational brands. And now consumers’ impression has shifted a little bit around these spaces. And I guess that has to do with the rising spending power of the younger consumers. And these consumers have grown up in an age where the quality of made-in-China products has risen, and they didn’t really have that baggage in their mind. And they’re more willing to pay for these domestic brands at a higher premium. They’re willing to consider them as higher quality.
Q: Are there any big, major shifts in the economy that you’ve noticed? Not just from COVID but, as you pointed out, the trade war during the Trump administration. Could you describe if you’ve seen any sort of major themes in the economy change because of both of these events?
A: So as you mentioned, there is sort of this shift, priority shift, from the internet economy or the quote-unquote intangible part of the economy to the more tangible parts, the manufacturing space, the making of things. And I think that’s where the focus of the government, but also investors, from venture capital to the secondary market, are focusing right now.
And I think that that is going to be a longer-term trend. As for the internet part of the economy, we are already seeing an organic slowdown of growth as China has been reaching a high penetration rate of internet users. So that high growth in the prior years is probably not going to be maintained in the next few years. But at the same time, there are industries like electric vehicles, renewable energy, solar, for example, where China is already a leader or is becoming a leader.
