First of all, we hope everyone is safe and healthy during this challenging and unprecedented pandemic. WestSummit has always had a unique perspective with our footprint in both Beijing and Silicon Valley. As a Firm, we have now collectively lived through over six months of lockdown: the first three months in China, where many of our Beijing colleagues uprooted their city lives and hunkered down with parents and loved ones in their hometowns. And the last three months, where the pandemic has sent shockwaves through the US economy and has Silicon Valley in the midst of great uncertainty.
China has experienced exponential growth over the past few decades. Once a closed economy and evolving into one of the World’s leading manufacturing and exporting hubs, China now has the largest GDP PPP (Purchasing Power Parity) globally according to the IMF with an estimated $27.8 trillion expected in 2020. As global estimates continue to change and vary, our Firm’s investment thesis, built around China’s continued economic growth and the emergence of China’s “new infrastructure” centered around technology, has only gotten stronger.
Two months after re-opening the China economy, how has the recovery in China looked?
We are in daily dialogue with our colleagues and portfolio companies in China, leaning on them for best practices on working remotely and forecasting the weeks ahead. As we know, China is a couple months ahead of the rest of the world in its recovery from the virus and its reopening process. Most companies are back at full strength and the streets around Beijing’s Central Business District (CBD) are once again bustling. To the right is a picture taken outside of our office on an evening last week.
Here are a few key takeaways and observations from the first two months of China’s Reopening:
- “W-Shape” Pattern of Economic Recovery: Two months into the re-opening in China, we have seen a “W-Shaped” pattern of economic activity. This behavior can simply be explained as workers are back and producing products, but consumer confidence lags (buyers are staying home from fear of the virus or fear of spending money). Although each country will have different social behaviors and buying patterns, this type of economic activity will likely be consistent with many households globally. For the past three months, families across the world have lived on “essentials.” As a society, we are reexamining our lives to define what is essential.
- Timing of China Stimulus: As this New York Times article highlights: “Supply is significantly outpacing demand,” said Larry Hu, the chief China economist at the Macquarie Group. “It requires stimulus to get China out of the second part of the ‘W.’” As US and Europe has injected nearly $3 trillion dollars in rescue and stimulus packages, economists are eager to see how China’s bailout response gets its own economy going. As Bloomberg’s Nannan Kou, Head of Research predicts, China’s new stimulus package could lead to a consolidation of industrial and technology companies leading to an emergence of some larger Chinese companies able to compete with global leaders across Industry 4.0.
- Acceleration of “New Infrastructure” Through Technology: According to the government-backed China Center for Information Industry Development, China is expected to spend 10 trillion yuan ($1.4 trillion) through 2025 encompassing areas such as AI, IoT, and other “industry upgrades.” Morgan Stanley estimates new infrastructure at around $180 billion each year for the next 11 years, $1.98 trillion in total.
The numbers are large, no matter how you look at them. It is a collective effort as well – more than 20 of mainland China’s 31 provinces and regions have announced projects totaling over 1 trillion yuan with active participation from private capital.
Technology will ultimately be at the center of it with over 20 provinces launching policies to support enterprises utilizing cloud computing services, according to a UBS Group AG note. As we’ve seen “Software Eating the World” in the Western hemisphere over the last decade, many of these companies have little to no presence in China. We are excited and more bullish than ever to see how China reinvigorates and reinvents its economy through its own digital transformation.