Expert_ The Challenges of Investing in China

How high risk is investing in the Chinese market now? Looming Trump tariffs, China's whaling economy, plus Beijing's clampdown on auditing firms, making the situation ever more complex. We tap John Pelson, author of Wireless Wars, for insight. John Pelson, thank you so much for joining us. Great to have you back on the show. Good to be here again, Tiffany. Now, to begin, foreign investor confidence in China seems to be at a record low, at least according to a recent survey by the American Chamber of Commerce in Shanghai, where less than half of the respondents said they were optimistic about the prospects for their businesses in China over the next five years. What do you see as behind that sentiment? Well, there's really three things that are going to drive investor confidence, Tiffany. First, you have the belief in the underlying market itself. How's the growth? What are the margins like? What's the opportunity? Second, you've got the question about whether the numbers supporting that analysis are reliable. So can you do an audit? Can you do due diligence and have confidence that your assessments of the markets are accurate? And the last is the recourse if things don't go as planned. So what's the court system like? What's the legal system like? And right now, I think China is 0 for 3 on those three really important categories that drive foreign investment. I want to go into the second one you mentioned, because we've spoken before about Beijing's expanded anti-espionage law, which widened a lot of rules over there where we were seeing a lot of China-based auditing firms especially getting raided their offices there, as well as the risks of arbitrary detention inside China. How do you see that factor fitting into this? Yeah, this is a real problem right now for China. Investors need to carry out due diligence. Any good ones, any ones that have any real money are going to do extensive due diligence. This is hard. It's getting a lot harder right now in China. The goal of your team is, among other things, you want to unmask discrepancies. You want to show things that aren't perhaps as they seem. And that's a dangerous business right now in China to be out there trying to find things that you're being told, especially by a state-owned company, and say, this isn't true, this isn't what's really going on. Even if you're brave enough to hang in there and say, we're going to get to the bottom of this analysis and figure out what's really going on with this company's financials, the government has been so hard on the auditors. As you mentioned, they've been fining them, they're even shutting them down, raiding their offices. And what you're also seeing now is the CCP is encouraging Chinese companies to abandon the reliable Western auditors like PwC and Deloitte and use local firms to do the due diligence for the Western investors. That is not a plus for somebody. We are about to have a second Trump administration. There's already talks of even more tariffs on Chinese goods. There's also the Chinese market itself and the economy there that has been struggling these past years. How do you see those factors fitting into the calculus that these executives are making? Economically, no one does well on the trade border. Both sides really suffer. I've always been against tariffs on an economic basis. But whether Trump administration is looking at it economically for balance of trade or geopolitically to assert power and to try to restrict risk from having Chinese elements that come into the U.S. networks and onto the U.S. roads in forms of electric vehicles, if it's being done for the political reasons that I really think it is being done, it's just going to hurt businesses. And that means it's going to hurt investors in China and it will hurt Chinese investors trying to sell into the U.S. So all the businesses get hurt on that, just like during wartime, just about every company takes a beating. Tom Pelson, thank you so much for your time. Thanks, Tiffany.