Companies doing business with China, as well as companies doing business with other companies that do business in China, should understand both the upside and downside potential for that country’s economic outlook. Portland economist Bill Conerly shares his view on what he thinks corporate executives need to know about the Chinese economy.
BY BILL CONERLY
China’s economy is increasingly important to many American businesses. Even if your company doesn’t export, you may be selling to another company that depends on China for a significant portion of its revenues. I’m not a China expert. But one of my clients asked for some insight with a business perspective on China, so I’ll share what I think corporate executives need to know about the Chinese economy.
The IMF’s forecast for China is reasonable at 9 percent inflation-adjusted growth. That forecast, however, assumes no collapse in Europe, which is a pretty big assumption. Companies doing business with China, as well as companies doing business with other companies that do business in China, should understand both the upside and downside potential for that country’s economic outlook.
China’s economic growth has been very good for quite some years. The consensus forecast now is that 2012 growth will be right in line with the country’s long-term growth potential of about nine percent per year. However, there are five key issues to consider:
Value of the Yuan
Inflation has been the focus of Chinese economic policy in the past year , and right now the policy looks successful. November’s inflation rate was 4.2 percent (measured from 12 months previous), down from 6.5 percent in July. This may be a bit of an aberration, and Chinese statistics should be taken with many grains of salt, but feet-on-the-ground observers think that the general trend is certainly true. China will likely allow growth to expand in 2012.
Housing prices are thought by some to be bubblicious. A fellow Forbes.com contributor Gordon G. Chang recent wrote “Residential property prices are in freefall in China . . . .” This may be true, but it’s also true that housing is not overbuilt in the China, and the quality of the existing housing is worse than befits a growing middle class. So an adjustment to new construction may be needed, but it’s not going to be the huge real estate collapse that we experienced here in the United States.
Export market weakness is the greatest risk to China right now. The European Union accounts for about 20 percent of China’s total exports. (Europe is about 22 percent of U.S. exports.) If the financial crisis on the Continent boils over into an economic collapse, then China will clearly suffer. Already it’s being stung by weaker sales to Europe.
Cronyism is a problem that will limit China’s potential, but it’s not really a short-run challenge. We can envision China increasing output-per-person substantially, but long before they get to the level of the advanced economies they will slow their growth because of the inefficiencies of their corrupt practices. However, they are years away from hitting that limit, and they may reform themselves in the meantime (though I’m not really optimistic on that score).
Finally, the value of the yuan continues to trend upward, which will limit export growth. This is actually a good thing, as the high foreign exchange rate hurts internal consumers. Allowing the yuan to rise to market levels is a good inflation-fighting technique and also relieves some political pressure. Don’t expect China to go too far in this direction, however, especially if economic growth slows.
American companies selling to China should be prepared both for continued growth and for a markedly slower pace. That requires some flexibility, but the facts are clear: China has a very favorable base case forecast, but it’s at substantial risk from a European downturn. Given that we cannot be sure that Europe will muddle through, the possibility of bad news cannot be ignored, even though my best estimate is for continued economic expansion in China.
For more help on what to do, check out my article on recessions and business planning.
Bill Conerly is a Portland economist and author of the Businomics Blog.