An Inside Look At What’s Happening In China

China’s sharp slowdown of late will catch many by surprise and wrong-footed. Indeed, over the next few months a painful adjustment will continue to unfold, requiring good information, solid planning skills and a strong ability to implement. Anticipating and managing risk must be the focus, but do not lose sight of China’s long-term trajectory — it will remain a prominent market and opportunity, outperforming developing and developed countries over the medium and long term. Do not get caught twice.

Now that we’re almost half way through the Year of the Ox, we can look back on a year in which the global economy has undergone profound changes. These changes include adjustments in the global banking and financing system; new trajectories in real economic growth; extreme volatility in energy; commodity, property and financial asset prices; dramatically reduced trade; layoffs of an unprecedented scale; corporate and country bankruptcies; and a scramble, internationally, to launch appropriate rescue packages.

In delivering these rescues, many nations broke some of their own sacred rules, even rules that were previously universally accepted as unbreakable. But worsening conditions progressively became more systemic and by the fourth quarter of 2008 impacted negatively on global sentiment and confidence — with most businesses now, in 2009, unsure about their prospects for the future.

These unfolding global circumstances are not encouraging. Towards the end of 2008, as China celebrated 30 successful years of market-oriented reforms, it became clear that China’s economy had been fully pulled into the global financial and real economic crisis and Q4 growth of 6.8% confirmed the severity of the adjustments that are in train in China. Indeed, looking ahead there is significant concern over China’s short term prospects.

We concur that over the 2-3 quarters, China will be growing at rates that are well below those that the world has grown used to. In line with Q4’s headline GDP growth, we anticipate Q1 and Q2 2009 to see growth well below the 7-8% range, widely viewed as the ‘minimum’ that can ensure stability in the country. Important though, is that we do see a rebound late in the year.

Still, it is not clear that the ensuing period will be a very challenging phase. During this time we identify a number of managerial imperatives for those that manage businesses in China or that have Chinese exposures to watch. The overreaching objective is to anticipate and manage risk in a few key areas.

So, we acknowledge the seriousness of the current and unfolding environment. We face testing times. But we must add that now, more than ever, it is necessary to maintain a balanced perspective to China’s future. We must guard again a view that is too heavily influenced by adverse short-term trends or prevailing sentiment that is so deeply negative (and deteriorating). A balanced view would also enable planners to differentiate between short, medium and long-term trends, issues and prospects.

Over the medium and long term, China’s prospects remain solid. We must also consider that it is natural for developing countries to face periods of turmoil. In this respect, China is really now just behaving ‘normally’ and there is no merit in becoming utterly disillusioned with China. Rather, see it for what it is: a key developing market, with the associated dynamism (good and bad) that is endemic in developing countries, but that will remain prominent and even become more important over the long haul.

Also, as China adjusts we can expect policies and changes that would in themselves represent opportunity, for example, in casting the Chinese consumer as a key pillar of future growth.

We can also expect more moderate and therefore sustainable growth.

Finally, we need to remind ourselves that populous China, with its roughly US$3.5 trillion GDP, is now the world’s third largest economy, growing —still — at a pace faster than the average for all developing nations, all developed nations and indeed the world. Even in dynamic Asia, it still leads the field. Moreover, we do see this changing. As such, over the long term it will remain a focal point in boardrooms around the world.

Ultimately, as we continue through the Year of the Ox, to navigate urgent short-term risks, we must not lose sight of, or be deflected from, the complex long-term maze that must simultaneously be ‘solved’ in order to capture full long-term advantage in the world’s leading developing market.

A Few Tips On Managing Risks In China

Here are a few areas that deserve attention.

• The landscape is changing. Various regions, sectors, policies and industry linkages and value chains are adjusting and reacting in different ways. Stay on top of these changes and manage information well.

• A strategic review is needed. The severity of the economic impact may render existing strategies either completely irrelevant or may at least make them somewhat out of date. A comprehensive strategic review is necessary with some elements of the strategy likely to change.

• It’s time to re-discover partners. Many Chinese firms and players have been affected already, some detrimentally so. Know how their strategic focus and ability to perform have changed and mitigate the associated risks.

• Conduct supplier audits and health-checks. Many firms that source from China are already ‘outsiders’ to China. Now is the time to pay close attention to the health of suppliers and their ability to deliver on previously (or newly) agreed contracts and to do a rolling due diligence.