Letter from Shanghai
Navigating the Downturn
Godfrey Firth
W
ith most of the world mired
in recession, all eyes are on
China’s much-discussed and
hoped-for potential economic recovery
in the fall of 2009 or early 2010. Many
multinational corporations seem to be
pinning their hopes for positive results in
2009 on their China operations. For
China-based managers, this hope brings
increased scrutiny and intense pressure to deliver. The
challenge of managing headquarters’ expectations, especially
during uncertain times, looms large in the meeting rooms of
multinational firms in Shanghai.
Hunkering down
The China operations of most companies reacted
rapidly and effectively to the emerging downturn in the
last quarter of 2008. Travel fell to a minimum, bonuses
were eliminated or cut, and salary increases were
postponed or reduced. Many companies conducted
minor reductions in force, pruning less-productive or
non-essential staff. The empty desk across the hall
represented a rude awakening to young Chinese
professionals accustomed to a double-digit wage bump, a
round of promotions, and crops of fresh-faced young
graduates joining the team every year.
The drumbeat of negative news about disappointing
earnings reports, falling share prices, and collapsing financial
firms was matched by a sudden and wrenching drop in
demand all along the global value chain, in which many
Chinese companies play a major role. Thinning order books
prompted many of these companies to cut to the bone, and
some unfortunate ones folded. Dislocations were
particularly pronounced in, but certainly not exclusive to,
China’s large export-oriented sector.
As local governments began collecting social insurance
contributions from enterprises for November and
December, the dramatic drop in employed staff at many
foreign and private Chinese companies caused serious
alarm in the corridors of power, from local governments
all the way up to the central level. In every economy,
cash is king for companies, but jobs trump all for
governments. The PRC policymaking elite reacted
quickly, and maintaining and creating jobs immediately
became the top priority driving policy decisions.
Of stimulus and silver linings
Of all the policy responses rolled out in late 2008,
none attracted more interest, analysis, and questions
16 May–June 2009 chinabusinessreview.com
from US-China Business Council member companies
than the ¥4 trillion ($585 billion) PRC stimulus
package. The package is an amorphous amalgamation of
existing policy priorities and pre-planned spending,
rolled together into a large package with a single, eye-
catching price tag, and presented to the public before
President Hu Jintao’s visit to the G-20 summit in
Washington, DC. The package was a green light to
ministries, provinces, and companies to move ahead
quickly with projects and spending. The result has not
been new projects, but accelerated implementation of
existing policy directives and projects and the early
launch of projects from the next five-year plan. The
majority of project funding in China, for both public
and private investment, comes from bank loans, and the
government has placed enormous pressure on the banks
to lend. The bankers have responded by throwing open
the taps, with ¥4.5 trillion ($658.5 billion) in new bank
loans in the first quarter of 2009 alone, a clearly
unsustainable rate, given that the lending target for the
full year is ¥5 trillion ($731.7 billion).
The business opportunities in the package vary from
sector to sector, with those in infrastructure, especially rail,
most plentiful. Companies have delved into the specifics of
the package to track down the highly elusive project lists
and information. This is a struggle, as transparency remains
weak at best. Some companies are working on other key
initiatives that are technically not part of the stimulus
package but have gained momentum from the political
imperative to spend. These initiatives include China’s
massive healthcare reform and the telecom network
upgrades associated with the roll-out of third-generation
(3G) telecom networks.
The early birds...
Cost controls are in place across the board, business
remains weak, and forecasting even six months ahead can
feel like tossing darts blindfolded. But in this
environment, energetic managers in Shanghai are focused
on mapping and targeting growth opportunities, whether
related to government expenditure or the inevitable
recovery. Regardless of when China emerges from the
downturn, the long-term fundamentals and deep-seated
optimism of companies operating here remain unchanged.
Smart companies are planning for growth.
Godfrey Firth is chief representative at the US-China Business Council
in Shanghai.