China's Influence on Small Economies May Be Shrinking: New Economy Saturday – Bloomberg

The fortunes of the world’s emerging economies once rose or fell in lockstep with China. No longer.

Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, writes that in recent years we’ve seen a gradual decoupling of GDP growth between the Asian giant and the world’s smaller economies. Now Covid-19 has collapsed the link altogether. China is growing more slowly as its government imposes lockdowns to combat the virus, all while reining in its real estate moguls and tech oligarchs. 

“China may not matter as much as it once did,” argues Sharma.

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International businesses are starting to reach a similar conclusion. Increasingly, companies that once focused their global strategies on China, extrapolating its high growth rates far into the future, are now planning less with the nation in mind. 

For instance, after Covid-19 highlighted the risks of concentrating supply chains in China, multinationals began looking at places like Mexico and Thailand to produce goods for the rest of the world. Some are bringing their supply chains home, a process of “reshoring” enabled by advanced manufacturing technologies like robotics and 3-D printing. 

Nobody argues that China no longer matters, of course. It is, after all, the world’s biggest trader, manufacturer and lender. 

Nor is there any evidence that multinationals in China are pulling out. In fact, surveys of U.S. businesses in the country (by definition the ones doing well, others having packed up and left) mostly plan to double-down on their investments. And although the regulatory crackdown on big tech that wiped out trillions of dollars in shareholder value prompted claims on Wall Street that China is “uninvestable,” record sums of venture capital are flooding in.

Rather, it’s dawning on investors that there are attractive alternatives. For instance, while China’s economy is sinking, Taiwan and South Korea are on a roll, boosted by their market dominance in semiconductors that are powering the digital revolution. As Sharma points out, the same forces of technology are transforming larger emerging economies, including Indonesia and India, which are building opportunities around mobile internet technologies. 

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And the coming “green revolution” is lifting prospects for producers of metals like copper and aluminum that come from emerging economies—among them Peru and Chile. All of this helps to explain why China’s share of global GDP growth has plunged from 35% before the pandemic to 25% today.

Moreover, for just about all investors in China, the risk calculus is changing. I pointed out last week that the decision by the Women’s Tennis Federation to stand up for tennis star Peng Shuai was a rare case of a Western organization placing principles above profits in China. But the group almost certainly input revenue calculations into its decision-making, perhaps concluding that the potential financial hit might not be as catastrophic as one might think.

Just ask the U.S. Professional Golf Association. China was supposed to be its next big market, the game having slumped in the U.S. when Tiger Woods lost form. Developers on Hainan Island laid out 10 golf courses side-by-side across a stretch of land 1-½ times the size of Manhattan.

But the growth of the sport didn’t survive President Xi Jinping’s early austerity drive (he prefers proletariat soccer to bourgeois golf.) Bulldozers moved in and ripped up scores of Chinese golf courses. Meanwhile, the game in America has spectacularly revived.

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There’s a broader lesson to be learned there. It’s not a given that China’s economy will overtake the U.S. in aggregate size. And even if it does, it will do so with fading momentum, held back by an aging population and massive debt.

These days, Chinese state media confidently proclaim that Xi has brought China “closer to the center of the world stage than it has ever been.” In March, the Chinese president boasted to the national legislature that China’s supposed victory over Covid-19 was the result of “self-confidence in our path, self-confidence in our theories, self-confidence in our system, self-confidence in our culture.”

Yet China is hunkering down and the virus still very present. The country is largely sealed off from the world by quarantines. Mao Zedong’s “self-reliance” slogan is back as the country invests in home-grown technologies and boosts its domestic consumer markets.

Meanwhile, as Sharma notes, emerging markets that once thrived primarily by selling parts and raw materials to the world’s factory floor are also gaining confidence. “Now, they have more options,” he said. So does everyone else: an enduring consequence of the coronavirus may be that global investors have seen other opportunities in the world beyond China.

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