Commerce, Freedom, China & A New Year

One of the biggest economic successes of the modern era has to be China. The country blazed through industrialization, modern communications, and modern infrastructure like no country before. Over a 50-year period they transformed a primarily agrarian class society into a modern industrial powerhouse, creating millions of jobs, a middle class, a modern standard of living, and the fastest growing economy of the last half of the 20^th century. 

For a long time, their unfettered growth made it seem as if Communist China’s version of capitalism was a never-ending cash machine. With year over year GDP growth double that of many other western nations, they seemed unstoppable, and there were many people forecasting that China would overtake the U.S. to become the world’s biggest economy by 2040.

China's Growth

IGA has over 1,000 stores in China, and our owners enjoyed remarkable success during that period (a much shorter period of 25 years from 1990 to 2015 compared with their Western retailer peers). They opened stores, grew into powerful regional chains and set new standards for quality, safety and service. The Chinese version of capitalism allowed a new generation of successful entrepreneurs. Personal wealth, property ownership, ready access to capital and all the other trappings of western-style capitalism worked — it fueled prosperity for a new young generation of owners and their growing chains, as double-digit revenue and store count growth was common.

But as capitalism brought prosperity, it also changed the power dynamic on the country. Before the shift to a freer market, party officials dominated every economic decision. In the 1970s, 80% of GDP came from public, communist-controlled state enterprise. By 2020 it was less than 30%. 

The thing is those with power rarely share that power lightly. Today we are seeing a state-led backlash against a perceived rise of capitalism and feared consequences. The entire Chinese bureaucracy has reemerged, determined to exert more government control and, in some cases, get their share of the economic prize.

You don’t have to fly to the East to know what happens when governments increase controls over private business, nor speak Mandarin to know the kinds of tactics that bureaucracy uses to prevent private wealth accumulation: fees, permitting backlogs, limiting access to public investment dollars, holding back tax incentives, and increased and onerous legislation are far too common no matter where you operate in the world.

As business owners, we know what happens to growth when capital is constrained. When free market economies become less free, growth stagnates, costs increase, and businesses either stop investing, stop hiring, and shrink — or they go away. A deeper wound is on the confidence, which is illustrated in newly-released data on slowed birth rates, consumption, and the real-estate market.

China Today

And that is exactly what we are seeing in China today. The very systems that allowed them to go from a peasant-based, agrarian society to a world powerhouse in global trade are suddenly unpopular. And as local and national party officials exert ever more onerous controls on entrepreneurs, unemployment soars, prices rise, consumer confidence plummets, and for the first time in decades, their overall economy stagnates.

What is more, global companies are losing enthusiasm for China. We can already see multinational companies moving production to other Asian markets (South Korea, Vietnam, etc.) and rethinking their dependence on China as the primary and often sole manufacturing source. In the short run, this is good for other developing economies; in the long run, China will likely soften its tactics and restore growth, as stagnating economies and maintaining political control usually do not go well together.

Between then and now the world waits to see what their new form of socialist capitalism will look like. And for those of us in the food industry, this means paying attention to the effects of an economy as large as China's that increasingly doesn’t use rational economic factors to drive its policy. Tariffs, import restrictions, new alliances with unfriendly governments, and more could be in our future.

As we close out 2023 and enter 2024, China's economic strategies will continue to impact the global food industry, from the top CPG manufacturers to independent grocery stores in towns across the world. And while the history and analysis of China's economics and the impact it has on the global economy is complicated and certainly a dense read, it's important for independent grocers to understand in order to estimate the impact that any potential manufacturing shifts may have on the food industry as a whole in the coming years.