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The Recession's Bite Deepens in China

9:00 AM MST | February 6, 2009 | By SIG FLOYD

The global recession continues to deepen as world political leaders scramble to come up with a credible plan to stem the tide of bad news.  In contrast to the “developed” economies, China managed to achieve close to 7% growth in Q4 and 9% growth for the year 2008, but here too the recession’s bite is being felt.

One of the key relationships that will determine the course of the world’s economy in 2009 is that between the U.S. and China.  An early look at the new U.S. Administration’s stance suggests that it will try to manage a difficult juggling act versus China, on the one hand pressuring for more appreciation in the Yuan and greater openness to purchases of US goods, and on the other supplicating the Chinese Government to continue propping up the U.S. treasury through its bond purchases.

Charges of “manipulation” of the currency have some basis in fact: in the past four months the Japanese Yen has escalated 17% vs. the U.S. dollar (from 105 yen/dollar to 90) while the Yuan has essentially remained constant at 6.84 to the dollar.  And what about the infamous “Buy American” clauses being proposed, which will likely at least in sentiment become part of the upcoming stimulus legislation, and which have already drawn the ire of the Canadians and Europeans?  Is this the tip of the iceberg in a global trade war?

So far, the Chinese Government has reacted calmly to these trial balloons by the fresh but inexperienced Obama Administration and the new Democratic majority in Congress.  By its control over the purse strings, China has virtual veto power over the US recovery, though it has nothing to gain by pressuring the US further into a depression by withholding its credit. 

To those commentators who see a dangerous situation for China in the immediate future as a result of social instability, we offer the following perspectives:

  • After nearly 30 years of continuous growth, most educated Chinese are supportive-or at least tolerant-of their government; there is no leadership class that would lead a major political revolt, and such a revolt is not going to come from barely literate migrant workers.
  • The Chinese Government controls the levers, both physical and abstract, to nip any potential uprising in the bud– and has the willingness to use them
  • With nearly 2 trillion dollars in foreign reserves, the government has ample funds to engage in social welfare projects, should that become necessary

As for any “Buy American” threat, it is a paper tiger – in the short run the hard-hit U.S. consumer is tapped out, and even programmed government spending will come up against hard limits that many categories of goods are no longer made in the U.S.  The “trade war” was won by China many years ago.  In short, we remain bullish on China in the political and the medium-term (though not in the short-term, next 6-9 months) economic context.
 

Practically, what can individual companies that are operating export-oriented plants in China do to “recession-proof” their investments?  Answer: as difficult as it may be, a renewed focus on the Chinese domestic market is now called for. China-based assets need to be made “China competitive”.  This is not going to be easy for U.S. and European firms, since it will entail a realistic assessment of the China market, fully recognizing the advantages of numerous Chinese firms that are all scrabbling to retain their share in a slower-growth environment, and a more localized cost structure.  Commitment to, and development of, key local staff becomes more important than ever.  In some cases, a relook at the possibility of joint venturing with Chinese firms may be worthwhile, though that is a path fraught with some risks.  But the alternative, relying solely on exports, is to face the certainty of losses, possibly for several years.
 

Sigmund Floyd is President of Valushar (www.valushar.com), a consultancy based in South Carolina and Shanghai focusing on analysis of business model, strategy and execution for multinational companies in Asia.

 ©Sigmund Floyd, 2009

 

 













 
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