A Better 2023 for Chinese Firms

Many businesses have had a challenging year in 2022. Chinese tech businesses have suffered massive losses in China, as Xi Jinping has tightly enforced Covid laws.

Several digital behemoths, including Tencent and Alibaba, have reported billion-dollar losses. In addition, since the epidemic, corporations have had their weakest growth rates in some years, with new Covid instances in the country causing executives to be concerned. However, investor concern has been minimal in the face of Chinese rules on Covid. However, with the Chinese government indicating that it would reopen the economy, next year should be a year of recovery for technology businesses.

“We are positive on the 2023 internet sector outlook in light of reopening story and improving consumer sentiment,” said an analyst.

Fortunately, the Chinese government’s attitude against the comeback of Covid throughout the country, notably on the Omicron, has shifted. According to Chinese Vice Premier Sun Chunlan, the latest Omicron varieties are less harmful than their predecessors. Furthermore, following massive protests that heightened tensions between residents and authorities, the Chinese government has reduced Covid laws.

“We believe Sun’s speech, in addition to the notable easing of Covid control measures in Guangzhou yesterday, sends yet another strong signal that the zero-Covid policy will end within the next few months,” said Ting Lu, a chief economist from Nomura.

“However, restrictions and lockdowns may not be truly moderate before March 2023 due to a likely surge in Covid case numbers and disruption. As the current narrative that Omicron is still very deadly has yet to be changed for a majority of Chinese people, especially those in less developed regions,” she added in a report.

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Covid businesses afflicted Chinese enterprises

The Chinese government has been tenacious in its pursuit of Covid. Xi established the zero-Covid policy, which included rigid controls and lockdowns throughout the country’s economic centers. Businesses and individuals have unavoidably suffered as a result of this. As the government compelled individuals to stay at home, company productivity plummeted, with Alibaba and other technology businesses claiming significant revenue losses.

“Retail sales decreased year-over-year in April and May due to the resurgence of Covid-19 in Shanghai and other major cities, and has slowly recovered in June,” said Alibaba CEO Daniel Zhang.

“What I find interesting is how the narrative on the big tech companies has changed. Early on in the pandemic, COVID was expected to benefit the big online platforms at the expense of ‘offline’ businesses. As much of the economy would be stuck at home with little other choice than to shop and entertain themselves online,” GFM Management wealth manager Tariq Dennison explained.

“The recent revenue and earnings dip hitting these big tech names reflects zero COVID concerns short-term. But also has many long-term investors, including myself, revising our estimates of the long-term growth prospects of these names,” he added.

“If this quarter is a sign of a permanent slowdown to single-digit growth rates, rather than just a temporary dip, that, of course, would have a significant impact on long-term valuations of these shares.”

The challenge for companies

Despite their optimism, analysts believe that Covid will remain the most significant obstacle for Chinese firms in the coming year. Nonetheless, as 2022 approaches, the prognosis should improve due to China’s reforms in dealing with the Covid epidemic. But it remains to be seen. However, Xin Sun, a senior lecturer at King’s College London, believes that if China abandons its zero-Covid policy, businesses will do better the following year.

“I will argue the prospect of a tech rebound next year depends primarily on the extent to which macroeconomy and especially consumption could recover,” Sun said.

“Given the current extremely suppressed level of consumption, largely due to COVID restrictions and also the lack of confidence among consumers, a tech rebound is indeed likely if China could smoothly exit from zero-COVID and reopen the economy.”

The good news is that analysts anticipate an increase in sales among technology businesses next year. While growth rates may not be able to approach those seen before the epidemic, it will be a good start for Chinese enterprises looking to improve their situation. According to experts, businesses should now embrace internet shopping since it is gaining popularity among a large population who is afraid to leave their homes.

“Beijing’s top priority this year is economic growth. The crackdown-style governance is over because Beijing has recognized that it’s a bad idea to spook markets and undermine business confidence,” said Trivium China Linghao Bao.

“We’ve already seen some recent attempts to relax Covid measures and rescue the property markets. That said, regulations will be here to stay. That means the focus has shifted toward a more measured, predictable approach to regulating big tech,” he added.

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Strategies need to change

Companies must adjust their business strategies to boost profitability next year, given the apparent shift in market preferences and patterns.

“The crackdowns have fundamentally changed the business logic these firms need to follow. In the past, Chinese tech giants strived to build the so-called ‘ecosystem,’ which, by aggressively acquiring and integrating different lines of business, increased customer stickiness and engagement,” explained Sun.

“Now they have to scale back to focus on their main business lines and seek revenue growth from optimized operation and innovation.”