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Wednesday, December 8, 2021

Are companies and investors aware of their risks in China?

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According to analysts at Bank of America, the profits of companies included in the S&P 500 are 90 percent correlated with the growth of China’s gross domestic product today. In 2010, the correlation was zero.

These are amazing statistics.

It is not incomprehensible if you dive into what it means. The S&P 500 includes the 500 largest publicly traded companies in the United States. Companies of this size – think multinationals like Intel and Starbucks – will receive sales from Chinese customers. You cannot become the 500 largest without working in the # 2 economy in the world.

The question arises: are companies able to manage the risks associated with operations in China, and do they adequately disclose such risks to investors?

A decade ago, the Chinese market did not matter to corporate earnings. This is the main driver today.

China is a market with unique risks. They pose real problems for companies and shareholders.

Shares in casino operator Wynn Resorts fell 25% from September 10 to 21 after the Chinese Communist Party (CCP) regime announced restrictions on casinos at Macau’s gambling center.

Nike shares fell 12% from March 16 to March 25 as they were censored on Chinese social media following a statement of “concern” over forced cotton picking in China’s Xinjiang region. And Nike has historically been a supporter of Beijing’s policies.

These were examples of significant damage to investors.

There are also problems that are not directly related to the movement of stock prices. China’s draconian restrictions during the CCP virus pandemic have wreaked havoc on restaurant operators like Yum China Holdings, Starbucks, as well as hotel companies like Marriott International. This impact is still ongoing.

On a Marriott Q3 call on November 3, when a Wall Street analyst asked about the risks of working in China, Marriott CEO Anthony Capuano joked, “Well, how much time do we have?”

Japanese group SoftBank, whose Vision Fund owns several tech start-ups in China including Didi Chuxing, which calls passengers, said in September it was investing “more cautiously” in China. Beijing’s tough crackdown on tech companies has forced SoftBank to write off more than $ 50 billion in assets.

There is no single type of risk in China. Obviously, the CCP’s regulatory whims pose a risk. China’s lack of judicial independence is another. Not to mention the CCP’s policies and views on US business in China. Chinese own companies are also becoming increasingly fierce competitors to foreign companies. Finally, China’s economy poses a macro-risk – slowing growth is affecting mining companies exporting natural resources and farmers exporting agriculture.

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In Barron’s November 15 issue, the financial newspaper compiled a list of China-sensitive S&P 500 companies based on the percentage of their annual sales received from China.

The top ten companies on this list in order include casino operators Wynn Resorts (70 percent of sales are in China) and Las Vegas Sands, chip makers Qualcomm and Texas Instruments, fiber optic firm IPG Photonics, computer hardware maker Western Digital, chip maker. NXP Semiconductors, radio and wireless technology maker Qorvo, semiconductor maker Broadcom, and glass maker Corning (33% of sales come from China).

I’m not here to argue that all companies need to leave China. Perhaps worth it to someone. Others, with the right structure, could see that the rewards outweigh the risks. But everyone needs to ask if they have the resources, know-how and experience to properly assess, identify and mitigate risks when working in China. And they must be independent enough to make objective assessments.

Even with the resources, do companies properly disclose such issues to investors? On corporate earnings reports China is a hot topic of discussion. For CEOs, CFOs, and corporate executives, it’s no longer enough to say “we are watching China.” The paragraph on the risk of doing business in China in the SEC’s filing is too vague. Companies need to inform investors how they are monitoring and what contingencies and hedging exist in order to deal with China-specific political, regulatory or economic developments. Business management in China should encompass functional departments and executive management.

Risk is not a one-way street. There are also opportunities with risks. But companies and shareholders need to become smarter and more informed.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.

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Fan Yu is an expert in finance and economics and has been analyzing the Chinese economy since 2015.

World Nation News Deskhttps://www.worldnationnews.com
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