8/14/2019 Letter From Shanghai: Navigating the Downturn, China Business Review, May-June 2009

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16 May–June 2009  chinabusinessreview.com

 W ith most of the world miredin recession, all eyes are onChina’s much-discussed and

hoped-for potential economic recovery in the fall of 2009 or early 2010. Many multinational corporations seem to bepinning their hopes for positive results in2009 on their China operations. ForChina-based managers, this hope brings

increased scrutiny and intense pressure to deliver. Thechallenge of managing headquarters’ expectations, especially during uncertain times, looms large in the meeting rooms of 

multinational firms in Shanghai.

Hunkering downThe China operations of most companies reacted

rapidly and effectively to the emerging downturn in thelast quarter of 2008. Travel fell to a minimum, bonuses were eliminated or cut, and salary increases werepostponed or reduced. Many companies conductedminor reductions in force, pruning less-productive ornon-essential staff. The empty desk across the hallrepresented a rude awakening to young Chineseprofessionals accustomed to a double-digit wage bump, around 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 financialfirms was matched by a sudden and wrenching drop indemand all along the global value chain, in which many Chinese companies play a major role. Thinning order booksprompted many of these companies to cut to the bone, andsome unfortunate ones folded. Dislocations wereparticularly pronounced in, but certainly not exclusive to,China’s large export-oriented sector.

 As local governments began collecting social insurancecontributions from enterprises for November andDecember, the dramatic drop in employed staff at many 

foreign and private Chinese companies caused seriousalarm in the corridors of power, from local governmentsall the way up to the central level. In every economy,cash is king for companies, but jobs trump all forgovernments. The PRC policymaking elite reactedquickly, and maintaining and creating jobs immediately became the top priority driving policy decisions.

Of stimulus and silver liningsOf all the policy responses rolled out in late 2008,

none attracted more interest, analysis, and questions

from US-China Business Council member companiesthan the ¥4 trillion ($585 billion) PRC stimuluspackage. 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 beforePresident Hu Jintao’s visit to the G-20 summit in Washington, DC. The package was a green light toministries, provinces, and companies to move aheadquickly with projects and spending. The result has notbeen new projects, but accelerated implementation of existing policy directives and projects and the early 

launch of projects from the next five-year plan. Themajority of project funding in China, for both publicand private investment, comes from bank loans, and thegovernment has placed enormous pressure on the banksto lend. The bankers have responded by throwing openthe 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 thefull year is ¥5 trillion ($731.7 billion).

The business opportunities in the package vary fromsector 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 stimuluspackage but have gained momentum from the politicalimperative to spend. These initiatives include China’smassive 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 canfeel like tossing darts blindfolded. But in this

environment, energetic managers in Shanghai are focusedon mapping and targeting growth opportunities, whetherrelated to government expenditure or the inevitablerecovery. Regardless of when China emerges from thedownturn, the long-term fundamentals and deep-seatedoptimism 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.

Letter from Shanghai

Navigating the DownturnGodfrey Firth