Stop Bleaking Out about Chinese Economy

International financial media and overseas managers are too quick to hit the panic button.

Western managers have been calling foul about China’s anti-competitive practices for the past 20 years – and since 2007 it has looked like

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overseas firms were going to be squeezed out of the China market altogether.  2006 was probably the high-water mark for international deal-makers in China — Chinese entrepreneurs were on the way up but needed western capital, technology and business processes. The crash changed all that, and until last week Westerners were complaining that China’s dominant state sector was creating an unfair playing field both at home and abroad. MNC career tracks were no longer attracting the cream of the crop among China’s high-impact graduates. Any Chinese firm with state ownership or “guanxi” with local bankers & officials (and that covered A LOT of businesses) could access endless piles of cash at almost no cost. Traditional Western advantages like efficiency, systematic management and due diligence frequently worked against them in China, both when trying to access the local market or manufacture for export.

Careful what you wish for

Now with China GDP growth decelerating (not crashing) in the near term and the Central Bank hitting the brakes with both feet, Western managers and investors have a new opportunity — but only if they move quickly. We’ve already looked at the advantages for HR managers and strategic planners who want to hire top Chinese grads.  As China enters a Central Bank led credit freeze, however, savvy international managers from every department have to reassess their approach to Chinese business. This is precisely the type of financial shock therapy that you’ve all been calling for at the smart AmCham networking events and the Sundowner Happy Hours. Now all you need is a plan, cash and backbone.
We can help with the planning.

Who benefits (potentially) from tighter credit in China:

SOE competitors. If BJ is serious about reining in bad investment, SOEs are going to have to contract. Once that would have merely meant fewer dams and tractors — but now that also covers a wide range of consumer brands and services. HINT: Government decision makers will care more about employment rates than GDP growth — at least for next couple of years. Private entities who feel squeezed by the state sector get three benefits – the first is on the hiring side, the second is that cash-strapped 3rd & 4th tier towns will be in deal-making moods – and the third is that anything that shakes confidence in the Chinese economic model makes western brands look good again. Don’t underestimate that last point. You’re about to get hot again – don’t blow it.

Partnerships are back in vogue. Partnerships were never really OUT in China, but many Americans used to avoid formal JVs at all costs (not without good reason). Western entrepreneurs and startups with a dream, some technology and maybe a little cash will be back in vogue in Shanghai and Beijing soon. Government and bank cash will be tighter — and that may have a knock-on effect on China’s VCs. Private Chinese businesses are much more capable and competitive than they were ten years ago, and now for the first time since the crash you are looking like a suitable match.

-International expanders who want a second chance at the China market. Western firms who thought that they had missed the China boat – or want to try again after a false start – will find that they have more to offer in a restructuring economic environment. For many Chinese firms, this is a great time to bank some of their domestic profits and expand overseas. A tighter China means more expansion for Chinese private businesses who – let’s be honest – did not have a great incentive to try to go global when their home market in China was growing at 8% and the cost of capital was a couple of bottles of Maotai and a few bar girls. This is good news for MNCs who need distribution, logistics or management in China — they can create a new bargaining chip by offering to help local partners flee a less buoyant home market.

The larger picture in China is just fine in the midterm. Urbanization, continued exports and a consumption-oriented middle class should continue. 20 years out the story really does get a bit bleaker — environment, demographics and politics will eventually trump policy and ideology. But for Western managers, the strain of China’s structural reform could pry open a few opportunities. Take a few calming breaths, assess the business landscape with a clear head, and make your move. For some this will be a second chance – but it won’t last long.


From this morning’s Want China Times (Taiwan)

China’s cash squeeze might continue: economists

Want China Times2013-06-24

China’s central bank seems to be attempting to let the cost of capital rise in the hope of directing capital flows into the real economy, an economist told the Wuhan-based Changjiang Times newspaper.
In sharp contrast with its past practices of releasing liquidity into the market through cuts in the reserve requirement ratio, the benchmark interest rate and reverse repurchase agreements (reverse repos), this time, despite a cash shortage in the market for a month, the central bank had decided not to take any measures to ease the cash crunch, said Li Zhiqiang, chief economist at the China Minsheng Banking…

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