Strategies for Short, Mid and Long term…
The global economies seem to be conducting a major shift that will continue over the next two to five years with China being a major force in the shift. The China that would have supposedly overtaken the US economy in 10 to 20 years is fading fast and can only be seen as a “Dream” best described the Chinese. With the Chinese GDP at 6.9% or the weakest in a quarter of a century, there are major slowdowns in all sectors. How is your business going to weather the storm?
Asia and the Middle Eastern countries are also reeling from the lower demand for their exported goods to China. Even the BRIC countries as well as Australia are also having major fallout an ocean away as their economies are heavily tied to China based on its previous years of heavy commodity orders. With China slowing and its debt mounting as well, it cannot afford to maintain its own economy in good standing. China is heavily dependent on its real-estate markets to support much of its GDP. The real-estate market in China is also the driver for commodity orders and other goods from abroad.
The Chinese economy is tightly tied to its real-estate market with much of its internal GDP directly related to this sector. Based on my conversations with a leading Chinese real-estate agency conducting business in Shenzhen and Shanghai, the real-estate markets are still strong in the major cities (for now); however, many of the tier two cities are seeing declines in property value due to oversupply and the slowing economy. China’s major banks have loan portfolios with more than 60% real-estate related loans as estimated by the Financial Times sources today. If there is a crash, the bad debt would be crushing and the Chinese government would not have the ability to easily re-capitalize the banks like they did in 2005 when they were preparing them for public offerings.
No other country in the world sets GDP goals so why does China? The reality is that the Chinese government knows that if they do not hit a certain goal in growth that their real worries would start to materialize by losing the “Social Stability”. Social Stability is not only a key term for keeping the peace that is often used in China, but it is also a mandate for the Chinese government’s rule. There is an unsaid pact that is well known in China even though not written anywhere between the people and the government. The informal pact can be best described as the people allow the government to rule as long as the jobs, good economy, reasonable housing and food are accessible…when this stops, the music stops, and it will not be pretty bad for the people left without a seat. The Chinese government knows this and that is why they are working so aggressively to protect currency, housing, stock and other markets, and setting GDP goals.
Knowing this information, the strategy that a US business should take is not one of panic, but to start making backup plans for alternative areas to produce goods. The writing has been on the wall for a long time that China’s labor, materials, and shipping costs have been increasing significantly. I am not recommending to change your production and suppliers right away, but there should be arrangements made in the short terms to have backup plans to maintain supply chains for products and to keep your trade financing, invoice factoring, and /or letters of credit in good standing. The long term strategy for China is hard to see with perfect clarity as it will also depend on your industry as there are many opportunities still left in China. The positive side is that many of China’s licenses are becoming easier to obtain as they continue to find new ways to maintain investment flows. The service industry in China and the online services are the next big wave and will continue to attract investment. Production of any kind due to wage inflationary pressures and limited labor force especially, in port cities will be hard to manage. Reviewing alternate countries such as Vietnam, Cambodia or even the United States may be a better option. The United States can be a very competitive choice with so many redevelopment credits and tax incentives from Federal Agencies and local governments. Producing in the United States also affords better quality control and lower shipping costs, and has to be very carefully evaluated.
PMF Bancorp has long specialized in financing trade and invoice factoring financing for companies in the US with $1 to $50 million in sales. Our head office is in Los Angeles, but we have offices in China and lending licenses in Asia as well so we are a rich source of real time information and would be happy to be helpful with your business finance related questions on conducting business with China.
