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Flagship Chinese companies, spanning sectors from tech to retail, are increasingly shunning the United States and expanding in less-developed markets such as Southeast Asia, where they can leverage historic low-cost advantages and build out supply chains, a Goldman Sachs strategist said. Chinese exports to non-US markets have grown at a compound annual rate of about 7.5 per cent since 2018, according to a research note by the investment bank. In contrast, exports to the US have declined by 0.6 per cent annually over the same period. 2018 marked a turning point as trade tensions between Washington and Beijing escalated, prompting Chinese companies to explore new markets, China equity portfolio strategist Si Fu said in an interview on Thursday. “Overall, we still see the overseas revenue is still growing,” said Fu, who works in the investment bank’s Global Investment Research Division. “And another thing, on products, China has been moving along the value-added curve.” The manufacturing of toys and textiles, she said, has been replaced by sales of consumer electronics, cars and Pop Mart figurines. Facing the US market, she said, “for many Chinese companies, they had to shift away or diversify their destinations”. Trade between China and scores of mostly developing countries under Beijing’s Belt and Road Initiative makes up 47 per cent of all trade, up from 32 per cent in 2005, Goldman Sachs found. The New York-based investment bank’s report, titled “Journey to the World”, said tariff risks may slow Chinese companies’ overseas expansion and compress profit margins. But it also highlighted that Chinese entrepreneurs have become more resilient this year, compared with 2018 and 2019, with “diversified supply chains and expanded end markets”. Chinese firms’ margins from overseas business are, on average, 20 per cent higher than domestic margins, while the overseas revenue of listed companies has grown from 14 per cent in 2018 to 16 per cent today, according to the report, which was released on Sunday. Goldman Sachs expects Chinese companies could grow annual overseas revenue by 0.6 percentage points. Emerging markets are attractive because China can maintain cost efficiency while serving lower-income consumers and improving product quality, Fu said. Consumer spending power and infrastructure in emerging markets “could be an issue, but it’s too early to worry about that”, Fu added. We still need to wait and see if they can build a more complete supply chain around the factories [in core emerging markets] Si Fu, Goldman Sachs Leading Chinese firms such as internet giants Alibaba and PDD, battery maker CATL, consumer electronics firm Xiaomi, electric vehicle (EV) brand BYD, and home appliance vendor Midea are among the 25 “buy-rated companies that look well positioned to compete globally”, the report said. Alibaba is the owner of the South China Morning Post. Fu said EVs and batteries are the fastest-growing sectors in which Chinese firms are investing in emerging countries. The strategist expects Chinese companies to continue selling in emerging markets because they have already built production capacity that stands to grow with an expansion of localised supply chains. Exports of some products, such as in the category of home appliances known as white goods, are “reaching maturity”, she said. Among emerging markets, she said, Southeast Asia is “more important – or the kind of place where Chinese go first for their assembly”. Many of the 5,000 Chinese investors in Vietnam alone have their sights set on Southeast Asia’s large and relatively young consumer population, the chairman of the Ho Chi Minh City branch of the China Chamber of Commerce in Vietnam told the Post in early October. Companies in most sectors of the Chinese economy will take three to five years to build up a supply chain in core emerging markets, Fu said. “We still need to wait and see if they can build a more complete supply chain around the factories there,” she said. “So, it’s in an early stage.”
