back to news 2009-03-16| AT Consult Newsletter! China Fighting Off the Crisis! Stefan Kracht, Executive Director of Fiducia Being dependent on exports, China’s economy will also be affected by the global turndown. However, China is in a better position to fight off the crisis than other countries and even holds opportunities for foreign companies. As a result of falling export demand and a significant reduction in FDI, China’s GDP growth rate decreased to 9% in 2008. Some analysts put the number even lower, citing indicators such as electricity output (down 13% year on year in January) and PMI (Purchasing Managers Index, a measure of manufacturing activity) (which fellfalling to the record low of 38.8 in November). However, the majority of economists expect the Chinese economy to continue growing, with the average estimated growth rate for the first two quarters of 2009 both being between six and seven percent. This is corroborated by the PMI and Baltic Dry Index (an index for shipping rates), as well as Chinese stock markets, all of which are currently rising again. One reason that China’s economy might bottom out significantly earlier than developed countries is the vast amount of financial reserves that China is holding. These give the government a powerful lever to create jobs and bring about economic growth. Equally important is the large number of people living in 3rd-tier cities or below, as well as in rural regions, where development potential is still huge. By tapping this potential, China can create domestic demand big enough to ward off the slump in export demand. A first sign of China’s determination to do so has been the stimulus package drafted towards the end of 2008. Focusing on basic industries such as infrastructure, construction, energy, automotive and steel, a core emphasis is the focus on less developed regions. Examples of this are subsidy programmes for cars and appliances in rural areas or the vast amount of construction projects that have been started most notably in Western China. This also constitutes one of the major opportunities for foreign companies at the moment. While the subsidies themselves mainly are intended to benefit Chinese companies, opportunities arise for foreign companies cooperating with these companies or supplying to them. In some cases, government backing might even go so far as to make Chinese companies a source of funding, such as in the case of the Rio Tinto investment by Chinalco or the rumoured take-over of Volvo by Geely or Dongfeng. At the same time, the upheaval that many industries currently are in has resulted in a large number of companies with financial difficulties. These could be attractive take-over targets; alternatively, foreign companies can attempt to push them out of the market through down-market expansion. Siemens, for example, recently announced a new focus on low-cost products aimed especially at developing markets such as China. Finally, China still offers a high cost saving potential in its less developed regions. Cities like Chengdu in Western China offer a cost level much below that of cities on the Eastern coast, which has prompted companies like Volkswagen or Intel to relocate some of their production there. So while the consequences of the economic crisis are going to be felt in China, they will be less severe than in other parts of the world. Because of this, China should play a crucial role in international companies’ strategy to weather the economic difficulties. If you are interested in the market China please contact us! |
