Why would the newly elected President of the United States, just days before his inauguration, meet with China’s most famous technology entrepreneur? Many TV viewers were left scratching their heads when Alibaba¹ Chairman Jack Ma casually strolled through the marble-lined Trump Tower lobby to meet with then President-Elect Donald Trump on January 10, 2017. Perhaps the most surprising aspect of the meeting was the main topic of conversation – farming – a bedrock of Americana, seemingly far-removed from Alibaba and Chinese E-Commerce.

Chinese consumers love U.S. agriculture products

According to the United States Department of Agriculture (USDA), as of the end of 2016, China was the largest importer of U.S. agriculture products. Last year, China was responsible for buying $21.4 billion, or over 15.9%, of the United States’ total $134.9 billion agriculture exports². Keeping these facts in mind, it is not surprising that the new Ambassador to China is Iowa Governor Terry Branstad, whose state has benefited from the export of farm goods, in particular soybeans, to China.

Ambassador Branstad actually has a long-standing relationship with Chinese President Xi Jinping dating back to 1985³. The two first met while Xi Jinping was visiting Iowa under a sister state partnership that then first-term governor Branstad helped establish between Iowa and Hebei province. At the time, Xi Jinping was a rank and file agricultural official studying U.S. farming technology. According to a report from NBC news, since that first trip to Iowa, Branstad and Xi have met on several occasions and frequently call each other "friend."

As incomes rise in China, the demand for U.S. agriculture products has also grown due to the discerning tastes and health-conscience attitude of China’s urban middle class. When U.S.-based Costco Wholesale Corporation* established a storefront on Alibaba’s T-mall, a virtual mall, days before Singles’ Day 2014, the world’s largest online shopping holiday, they sold over three tons of nuts and one ton of dried cranberries to Chinese consumers in a matter of days⁴.

Three years ago a Chinese company, Shuanghui International Holdings Ltd*, bought Smithfield Foods, the largest U.S. pork processor. Below is an example of Smithfield pork sold through Alibaba under the Shuanghui brand. Notice something?

That American flag packaging tells Chinese consumers that the food comes from the United States. It is an indication of quality and reliability. The USDA has established a large presence in China to help U.S. farmers navigate local regulations and bring their products to China.

Beyond agriculture, many U.S. businesses are profiting from the Chinese consumer

China’s urban middle class increasingly has a taste for Western goods that goes beyond agriculture products. America's auto industry is also thriving in China, lead by General Motors (GM)*. China has been GM's largest retail market for the past five years. Last year GM and its joint ventures delivered a record 3,870,587 vehicles in China⁵. GM has achieved this success through eleven joint ventures and two wholly owned foreign enterprises as well as more than 58,000 employees in China⁵. GM is also selling cars online. During Singles Day 2016, GM sold 4,000 Chevy Cruzes through Alibaba⁶.

Beyond GM, there are a number of other U.S. companies profiting from the Chinese consumer:

U.S. – Chinese business partnerships are thriving

U.S. brands can achieve increased sales in China through partnership with domestic Chinese companies. There are a number of recent high profile partnerships that highlight the popularity of this model:

Wal-Mart* & JD.com⁷
On June 20, 2016 Wal-Mart announced it was acquiring approximately 5% of JD.com, Alibaba’s chief rival⁸. The strategic alliance was formed to help Wal-Mart access additional consumers across China through a powerful combination of E-Commerce and retail.

Priceline* & Ctrip⁹
In August 2014, Priceline invested $500 million in Ctrip through convertible bonds. Zacks Equity Research estimates that Priceline owns as much as 15% of Ctrip. According to Zacks, Priceline’s agreement with Ctrip enables it to share inventory and thereby capture outbound traffic from China¹⁰.

Tesla* & Tencent¹¹
While Tesla sold $1 billion worth of cars in China last year¹², recently Tencent took a 5% position to further assist in automotive sales¹³. According to a report from CNBC, Tencent could help Tesla sell - or even build - cars in China, the world's largest auto market, while Tesla would get a leg up in the self driving car market in China, currently dominated by rival Baidu¹⁴.

Chinese partners provide U.S. companies with strategic guidance for navigating local rules, regulations, and cultural tastes. Partnering with Chinese technology companies can bring access to massive platforms for reaching new customers that would otherwise be unattainable. Tesla’s recent partnership with Tencent gives the firm access to Tencent’s 800 million monthly users¹⁵. Even for a successful company like Tesla, building an audience of 800 million would likely be impossible.

Reexamining the trade imbalance

Even with all these examples of U.S. businesses thriving in China, the topic of trade imbalance is still a point of contention. We believe too much emphasis on the perceived one-sided nature of the relationship ignores both the growing demand for U.S. goods amongst Chinese consumers, and a core principle of trade. When an emerging market country and a developed market country trade with one another, the developed market has more money to buy more goods from the emerging market. This imbalance is the primary reason a trade deficit exists between the United States and China.

Stepping back, U.S. exports to China have been on the rise over the past several decades. In 1990 the U.S. exported $5 billion worth of goods to China, by 2000 that number grew to $16 billion, and by 2010 it reached $91 billion. Last year the U.S. topped $115 billion worth of goods exported to China. While this number is much lower than the amount we imported from China ($462 billion), it still shows healthy growth, and a major opportunity for U.S. exporters¹⁶.

We are confident that U.S. exports to China will continue to accelerate in the years to come. The wage gap has been narrowing especially amongst China’s urban middle class. This segment of China’s population increasingly has a taste for American and Western goods. We believe President Trump's appointment of Ambassador Branstad, his early meeting with Jack Ma, and more recent summit with president Xi Jinping, signifies the United States' dedication to fostering a successful business relationship with China. Whether you are an unexpected beneficiary of this trend, like the American farmer, or a global corporation, like GM and Costco, there are two key points to remember when selling U.S. products in China: 1. It pays to find a local partner 2. the Chinese consumer prefers to shop online.

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This article is intended for educational purposes only and should not be construed as investment advice. All opinions or views expressed in this article are current only as of the date of this article and are subject to change without notice.

*Theses companies represent 0% of KraneShares net assets as of 3/31/2017

1. Alibaba % of KraneShares net assets as of 3/31/2017: KWEB: 9.47%, KEMP: 1.81%
2. Data from the United States Department of Agriculture, retrieved 3/20/2017
3. ALIYAH FRUMIN, "China’s President and Trump’s Ambassador Pick Go Way Back", NBC News, 12/07/2016
4. TRICIA DURYEE, "‘Singles Day’ is huge: Alibaba on pace to top Black Friday and Cyber Monday sales in one day", GeekWire, 11/10/2014
5. "All About GM: GM China" General Motors C., retrieved 4/20/2017
6. Alizila Staff, "CAR SALES WERE FAST AND FURIOUS DURING ALIBABA’S 11.11 SALE", Alizila, 11/15/2016
7. JD.com % of KraneShares net assets as of 3/31/2017: KWEB: 7.93%
8. "Walmart and JD.com Announce Strategic Alliance to Serve Consumers across China", Walmart, 6/20/2016
9. Ctrip % of KraneShares net assets as of 3/31/2017: KWEB: 6.34%, KEMP: 0.41%
10. "Priceline to Boost Stake in Ctrip with $500M Investment", Zacks Equity Research, 12/11/2015
11. Tencent % of KraneShares net assets as of 3/31/2017: KWEB: 10.52%, KFYP: 4.16%, KEMP: 3.50%
12. Jamie Butters, "Tesla's China Sales Triple to More Than $1 Billion", Bloomberg, 3/01/2017
13. Meghan Reeder, "Tesla deals boosts Chinese presence in US auto tech" CNBC, 03/28/2017
14. Baidu % of KraneShares net assets as of 3/31/2017: KWEB: 7.43%, KEMP: 1.33%
15. "TENCENT ANNOUNCES 2016 FOURTH QUARTER AND ANNUAL RESULTS" Tencent, 03/22/2017
16. Data from United States Census Bureau retrieved 4/20/2017

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