China Economic Crisis ‘Industry Specific’

December 18, 2008 Posted by China Briefing Reading Time: 2 minutes

Dec. 18 – The China exposure to the global economic crisis is limited in nature and is not affecting all industry sectors. As we exclusively handle investments from foreign clients in China, Dezan Shira & Associates is in a good position to gauge FDI trends in China.

We are seeing closures of some operations in China, but we are also seeing patterns emerging in the types of businesses affected by the economic downturn and those who are not. Businesses involved in low end manufacturing with high labor pools and large export markets have been hit twice – once by an increase in overheads attributable to the impact of the new labor law, and again to the shrinking of overseas markets for their goods. These businesses are at risk and we are seeing closures and layoffs, mostly in Guangdong but also to a lesser extent in Shanghai and the Yangtze River Delta. However, these are mainly SME style operations and are not significant financial investors in the PRC, although they do possess sizable labor pools.

Businesses in China that are manufacturing here and selling to the domestic market appear to be buoyant, despite initial concerns over the extent of the credit crunch and whether or not China would be affected by it. Retail sales in China were up 22 percent last month, the highest in nine years, and many are reporting growth expectations for 2009. However, industries such as auto and property do appear to be slowing down and they may face 2009 with little or no growth. Conversely, the luxury goods market appears buoyant. The Chinese are still buying LV, Prada and Gucci and businesses in this sector appear optimistic over 2009 performances.

When looking at an optimum business model for success next year, companies with existing consumer brands having already achieved local market penetration with a local perception of superior quality will do well, even if they are sold at a premium above local produce. The domestic market is fed up with poor quality and tainted local products, and now is the time to get more stock or the perceived superior quality and consistency of international brands, altered for local market sensitivities, onto the shelves. These companies will do well during 2009, and some are privately expressing anticipated growth next year of 30-40 percent in revenues.

That said, now is a time to be prudent as it is possible from what we hear in other markets that China FDI could dry up. At present however, there is no signal from our industry that things will get significantly worse. We note that KPMG and PWC announced yesterday that despite laying off transactional personnel last week – related to a downturn in mergers and acquisitions – they have also seen an increase in graduate intake from January. The FDI market into China still looks healthy, albeit slightly battered, and MNC’s concerned about slow and negative growth in the United States and Europe still see China as an opportunity.

So although the economic downturn in China may be painful for some, it appears that across the board, the crisis is not having the effect that many in the news media have predicted. In many sectors, investment remains strong and businesses committed, and with China’s economic stimulus package focusing attention on the country’s infrastructure, many will be in a prime position to benefit as China ramps up construction.