Winners and Losers during a China Downturn

Posted by Reading Time: 2 minutes

By Chris Devonshire-Ellis

Nov. 13 – China’s slowdown has been covered by global media and most of what’s been written has been made up of doomsday rhetoric related to the demise of Wall Street. While a number of complications surround the global credit squeeze, China appears a simple case to assess. Essentially, businesses that focus on the sale of products or services to export markets that are in decline will suffer, while those who have a healthy spread of sales into the China market will thrive.

Let’s look more closely at both scenarios. Although the trend has been downward in the past few months, and businesses in Guangdong Province have been hit hard, there are still significant ifs and buts to consider on just how deep the damage will go.

Guangdong accounted for about 28 percent of China’s total value of exports per year. Stories have been rife about the extent of factory closures and rising unemployment. However, not all of this is due to the recession.

Unfortunately timed labor law and tax reforms introduced at the beginning of the year saw less than well- managed factories shift elsewhere, either further inland in China to offset the costs of higher labor against lower costs for land, or to Vietnam with less stringent laws on labor rights and environment.

Guangdong has also become politicized, with many Hong Kong and Taiwanese investors quick to ask Beijing for additional concessions when business gets tough. Politicking behind the scenes, because many Hong Kong factory owners are also members of the National People’s Congress, means that handouts and tax rebates on VAT have been quick to arrive from Beijing. Many companies are using the recession as chance to bargain more from the government at a time when it is vulnerable.

Statistics show that during a downturn in the United States or Europe, the market share of Chinese manufactured products increases. While there is no doubt there has been a significant slowdown in exports from China this year, how long this trend will remain is unclear. Preparations made for a recession are challenging, but consumers will continue to buy, albeit less expensive products.

It remains to be seen if the impact of the global credit crisis has filtered through the China’s export orders. Chinese exports could also be affected by trade protectionism issues and it remains to be seen what the United States’ new president may do about this.

On the other hand, Europe has already stated it will not take any protectionist measures against China. The export downturn in Guangdong may be, in hindsight, a momentary blip. Local factory owners have been able to wrest concessions over VAT, customs duties and huge infrastructural development project spending from the government because of the global downturn.

Businesses that sell in the local market may even do okay if not prosper. Much of China remains unaffected by the global downturn, and again, the government has been active in supporting an economic stimulation plan for the local economy. Banks will continue to lend. Even China’s retail sales jumped by 22 percent last month, the highest increase in nine years.

When assessing the likely impact of the global downturn in 2009, businesses will need to look at the spread of businesses they serve: Are they export driven or are they domestically focused? Although one thing seems certain, when it comes to China, it is premature to suggest that 2009 will be a year of retrenchment.