China Update: Covid Recovery Good, Balloons Bad
February 15, 2023

As I spoke about in last month’s newsletter, in early December China lifted the bulk of its Covid restrictions. Now, with the Chinese New Year holiday over and the migration of workers having returned to factories, the border has officially opened for business and tourism travel. Hong Kong has initiated an aggressive campaign (called “Hello Hong Kong!) to return the city to pre-Covid levels of travel. Airlines around the world are starting to add routes to Hong Kong and Mainland China back into their schedules.

So, what does the current business climate look like for China? On the positive side, now that we are past the Chinese New Year holiday, manufacturing capacity for Toy & Game Industry products is approaching 100%. Early indications are that raw materials and labor costs are stable. UK & Hong Kong based Fitch Ratings has revised their forecast for China’s economic growth for 2023 from 4.1% to 5.0%, indicating a faster rebound due to the lifting of China’s “Dynamic Zero Covid19 policy”. And the International Monetary Fund has revised its forecast for China’s growth from 4.4% to 5.2% in 2023.

But all is not rosy on the horizon. Additional factors more recently that may ultimately filter down to the Toy & Game Industry is the business and political climate between the U.S. and China. On the political front, tensions seem to be mounting. The recent incursion of one and possibly more Chinese surveillance balloons over the U.S. is causing a heightened anti-China stance amount politicians and the public. Republican governors (Greg Abbott of Texas, Glenn Youngkin of Virginia, and Ron DeSantis of Florida) vowed to support legislative bans on Chinese land ownership and even real estate in some cases. Also, Gov. Youngkin killed a deal to bring a $3.5 billion battery plant to rural Virginia because Ford Motor Company’s partner in the project is a Chinese company.

Back on the surveillance balloon issue, while China had initially taken a conciliatory approach in response to the issue, they are now being outright confrontational on the matter, engaging in a high degree of “whataboutism” and charging that last year the U.S. “illegally” flew high-altitude balloons over its airspace more than 10 times. This is a charge that the U.S. military flatly denies. Clearly, this is an area that we all need to keep an eye on. That said, any rising tensions between China and the U.S. that may have any impact on the manufacturing and importing of products in the Toy & Game Industry will undoubtedly affect a myriad of other consumer product industries and the global supply of raw materials. In other words, political consequences affecting the business climate will be impacting far more than just our industry.

In terms of the business climate between the two countries, currently, the Chips and Science Act of 2022 represents the most significant effort to thwart Chinese growth goals and potential dominance in this sector by containing the exporting of semiconductor chips and chip making equipment to China. Their digital economy represents 39.8% of China’s gross domestic product, and limitations to high end semiconductor chips will result in a throttling back of their growth goals. Despite this, economists are nevertheless forecasting that the reopening of China will be beneficial to the global economy, as it will help ease production bottlenecks that have worsened inflation and will create more demand from Chinese households.

In response to some of the concerns over China, GPI has recently expanded our network of factories we work with. We’ve also established a manufacturing partnership with a Vietnamese factory. Manufacturing capacity and capabilities, product sourcing, and quality are very high.

We’ll continue to watch these and numerous other issues, and keep you closely advised.

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