Doing Business in China When the Economy Cools

Moody’s lowers China outlook after Fitch downgrade

CRAIG STEPHEN’S THIS WEEK IN CHINA —  China ‘hard-landing’ trades revisited

Commentary: Commodities, currency bets begin to pay off

 

The Chinese bears are out again – and we’re not talking about pandas. Talk of a China economic downturn is finding its way into the more responsible corners of the financial press – Moody’s and Fitch have downgraded government debt (slightly) and Market Watch is talking about the potential of trades that profit from China’s fall.
Does a slightly poorer China mean more leverage for international managers and entrepreneurs trying to do business in China? The answer is a clear No, Maybe and Maybe.

Doing Business in China during a Downturn — We’ve got bad news  and unclear news.

  • No. If Beijing goes to its familiar stimulus playbook then waves of cash are headed for SOEs (state owned enterprises) in China’s interior. Chengdu seems to be popular in the state press these days. While this will undoubtedly mean more money sloshing around in the economy, the net impact will be fewer business opportunities for private Chinese businesses – and their overseas partners, suppliers and distributors. SOEs compete directly with domestic Chinese private companies. Lately there has been more pressure (or at least talk about it) to cut back on “bridge to nowhere” infrastructure spending on the local level – so look for the stat- run giants to get even more involved in activities that private could potential profit from.
  • Maybe. Western firms with the ability to put new plants or job-creating offices on the ground will have a bit more leverage than they did a few years ago. If you have been weighing expansion or hiring plans, shop around to see if second or third tier cities are cutting more creative deals. There may be improved chances for partnerships, tax incentives and cheap land, power & water – but you should plan on moving pretty far inland. The numbers will only work for certain businesses.
  • Maybe II. As the business environment – and the ecological environment – both deteriorate, more and more successful Chinese will be looking for ways to establish a foothold in established Western markets. There has already been plenty of Chinese overseas buying – whole companies in Europe, and real estate in the US. Western businesses that know how to leverage their Chinese partners’ aspirations for international mobility can cut some good deals as locals with cash push to build overseas escape routes. Every downtick in the China indices means a Bay Area realtor gets his wings.

Chinese on the street have been pretty insulated from the downturn, and feeling pretty happy since the crash forced American and European managers to re-evaluate their worldview in 2008. Beijing policy and party guys are the ones doing most of the panicking right now, but if they get jumpy then the skittishness will trickle down. The party plan is for SOEs or state aligned privates to take a bigger role – that’s probably one reason that BJ has turned a blind eye to the capital flight that WSJ and other Western business press have been crowing about for the past 5 years.  The “regular wealthy” are concerned with securing wealth, and that may mean moving both family and business interests overseas. This gives savvy investors an opening – but just once. Use it wisely

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