Geopolitical tensions greater threat to China businesses than COVID-19

China’s economy appears to be bouncing back from the COVID-19 crisis. Chinese GDP grew by 3.2% in the second quarter of 2020, following a record 6.8% contraction in the first. Furthermore, in July, factory activity in China expanded at its fastest rate in nearly a decade. Government investment in infrastructure and real estate is one of the main factors driving the recovery. Factories are also ramping up their manufacturing of electronic products to meet demand from newly remote workers in overseas markets.

On the face of it, there is plenty to be positive about, but what’s the reality on the ground for businesses in China? Members of the North Asia Regional Advisory Panel of the Association of International Certified Professional Accountants shared their views in a recent discussion. These are the main themes that emerged:

Recovery is well underway

Chinese businesses benefited from a notable pick-up in growth during the second quarter of 2020. Most of the finance leaders in the discussion said their organisation’s financial results had held up well in the first half; in some cases they were performing better than last year. Nevertheless, trading conditions remained challenging for some. Local governments are supporting the recovery through policies and subsidies that create new opportunities for businesses. Companies are forming partnerships with each other as they look to innovate and generate growth. They are also expanding overseas to help diversify their supply chains.

Geopolitical tensions are a major threat

During the course of 2020, China’s relationships with a number of other countries have worsened. Relations with the US, the UK, and India have particularly deteriorated, with the US now threatening a crackdown on Chinese tech companies that operate on its soil. The new national security law for Hong Kong has also attracted widespread criticism.

Going forward, geopolitical tensions might discourage multinational companies from making further investment into China, which could impact local businesses’ capacity to grow. Significantly, the finance leaders in the discussion thought that geopolitical tensions were a greater threat to their businesses than COVID-19.

Innovation is happening

Chinese businesses are pivoting in response to the crisis. One finance leader, who works for an auction house, said his business was looking to establish an online viewing room, using virtual reality technology, as well as other online tools. Another finance leader said that his company has a private-equity fund, which is buying up cheap assets from overseas markets.

Businesses anticipate a second wave

Parts of China are already wrestling with a second wave of COVID-19, while Hong Kong appears to be experiencing a third wave. Finance teams in Chinese organisations are responding to the ongoing threat by taking an agile approach to planning. They are continually updating their estimates and working with business partners internally to identify how they can free up resources to invest in growth.

The finance leader for a beverages company said her organisation was holding inventory for longer periods in anticipation of a significant second wave. Business continuity planning will help Chinese businesses to withstand another prolonged outbreak of the virus. They should also ensure that they have sufficiently robust IT infrastructure in place.

Finance teams are planning ahead

Although finance teams are planning ahead for 2021, it is difficult for them to make certain assumptions since consumer behaviours and trade patterns have changed in the wake of COVID-19. For example, families typically stock up on food and drink in advance of Chinese New Year, but it’s not clear whether eating and drinking trends will go back to normal in time for the next celebration in February 2021. In general, Chinese finance leaders are cautiously optimistic about the economic environment in their country, but they are not necessarily optimistic enough to advocate large-scale capex investment.

Staff morale can be an issue

Some organisations face significant issues around staff morale. This is particularly the case in businesses where annual bonuses have been cut in response to the economic downturn. So, finance leaders are working hard to motivate their staff and encourage them to stay with the business through these challenging times.

What’s next?

Just like their peers in the rest of the world, Chinese finance leaders are having to navigate considerable uncertainty right now. It is still unclear how quickly the global economy will recover from the shock inflicted by the pandemic, and a slow recovery will inevitably act as a drag on Chinese growth. Furthermore, a sustained outbreak of the virus in the autumn and winter months could actually set back the global recovery altogether. Depending on the result, the US presidential election in November could provide greater certainty — and usher in a new era of US-China relations — or it could result in further tensions. The next few months will be a telling period. Much remains to be seen.

— Andrew Harding, FCMA, CGMA, is chief executive–Management Accounting, and Vicky Li, FCMA, CGMA, is regional vice-president–North Asia, both at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.