One of the compound questions our China lawyers are getting almost daily is “what is happening with China’s economy and what should we do about it.” This post will partially answer both halves of that question.
Our assessment of China’s economy is not based on any deep analysis we perform; it is based on what we read in the mainstream media and in Chinese media and on China social media. Perhaps most importantly, it is based on what you, our readers, tell us in your comments and in your emails to us and on what our own clients tell us.
What we have been reading and hearing is that China’s economy continues to sink. The South China Morning Post did a story earlier this week on how China’s manufacturing profits have fallen nearly 16 percent year-on-year, to their lowest level since 2011 and the “biggest crash since 2009.” See China’s economic concerns mount as industrial profits crash to lowest since 2011. I hate to say this (actually I love saying it), but we told you so. Way back in October, 2018, we came out with a controversial post, titled, Would the Last Company Manufacturing in China Please Turn Off the Lights. In that post we unequivocally stated that American and European companies were moving their manufacturing out of China:
The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, India and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.
On top of the client and potential client calls, we have also been getting a steady stream of reporters asking us for permission to talk to our clients leaving or looking to leave China. We tell them that for various reasons, none of our clients are likely to want to discuss their leaving China and then they usually tell us that they “understand.” See How To Terminate Your China Supplier: Very Carefully and How to Leave China AND Survive.
With the extreme reluctance for anyone specific to say that they will be leaving China, whenever we write about companies leaving China (especially when we do so on our China Law Blog Facebook page) we get hit with invective against us claiming we are making this stuff up because we hate China. Well guess what everyone, there is now strong factual support for what we have been saying for the last few months. A huge chunk of foreign companies are looking to move their manufacturing from China.
And if that first post wasn’t strong enough, we came back even more downbeat in December with Would the Last Foreign Company in China Please Turn Off the Lights: A Sort of Part 2. What we were hearing (again and again and again) was that American and European companies were “front-loading their China product purchases in late 2018, both to prepare for the upcoming holiday season and to beat the Trump tariffs. This led us to conclude (well actually just repeat what our clients were telling us) that China product sales would start falling off a cliff come February and continue to do so as production moved from China. The March statistics are confirmation of this and we expect April and May to be even worse.
Yet all this can for you as a foreign business (and not just in manufacturing) can be a good thing.
During a prior China downturn (2008-2009) we wrote, Is Your China Business Recession Resistant? What Is? In that post, we highlighted how when an economy declines, let’s say 10%, not every industry sector declines 10%. Some really tank and others thrive:
One of the things I have always found fascinating is how macro economic issues can have such widely varying micro economic impacts. By this I mean that when an economy starts tanking, let’s say 10%, the impact on individual businesses can be all over the map.
I remember becoming starkly aware of this during the 1997 Asian Crisis, as I spent a considerable amount of time in Korea that year. The news was doing a story on the drop in imported goods coming into Korea. Now I do not remember the numbers very well at all, but I think imports had declined about 20%. But the really interesting part was how unevenly this fall in imports was among various products. The one that stands out for me is that some fruit (I am 99% sure it was either kumquats or quinces) had gone from $20 million in imports the year before to absolutely zero. Zero. The reason given for this was that it was a luxury and that such luxuries were no longer in demand. Some staple food products had seen virtually no decline.
I have a lawyer friend who represents a huge number of medical practices. He told me of a surgeon client of his whose practice had been decimated when insurance companies reduced their payments and stiffened their reviews. Giving my best guess to the numbers again, he said that surgery rates had declined about 5% across the board in the country, but this guy’s practice had been hit so hard, his income had gone from something like $450,000 a year to around $50,000. There were various reasons this had happened, but obviously this particular surgeon contributed a lot more than most of the others to the overall 5% decline in surgeon payments.
I mention all this because I have seen very little written about how China’s decline has impacted businesses differently. My firm has seen increased business of late from companies related to energy and fuel savings, food companies, gaming companies, health care companies, education related companies, and, (no surprise here) collection companies. All of these companies seem to have relatively stable (or even rising) income flows and they are seeking to expand in China or take advantage of China cost savings. Those businesses which seem to have been hit hardest are in luxury goods companies, clothing companies, and financial services companies. Currency fluctuation can also have a huge impact. We are seeing increasing numbers of Japanese, Russian and Korean companies looking to purchase US business and real estate assets. The strength of the Japanese Yen has made US assets relatively cheap, while Korean and Russian companies are looking here out of fear for further declines in their currencies.
So what do we know about how China’s slowing economy is impacting China’s industries and how can you benefit? We know manufacturing is down and this invariably leads to an increased willingness by Chinese factories to reduce costs or required quantities. On the flip side, on the very same day it came out with its article on the decline in China’s manufacturing sector, the SCMP did a story on how “China’s private tutoring industry is booming despite economic slowdown.” This article also noted how international schools are rapidly increasing as well.
What else is happening? China investment overseas, particularly in developed countries has also plunged. If you are planning to sell all or part of your company to a Chinese buyer, you probably should think again. It’s still possible, but less likely. China overseas investment into the United States and Europe fell 73% in 2018. That alone ought to tell you something.
Because our law firm does so much China media and entertainment law, we have seen up close a decline in productions, but we are also starting to see that slowly pick back up again. For a downright fascinating article on what has been happening with China movie production, check out “The Big Error Was That She Was Caught”: The Untold Story Behind the Mysterious Disappearance of Fan Bingbing, the World’s Biggest Movie Star
Despite all the gloom, China’s economy is still allegedly growing at about a 6% rate, which if true, is quite high as compared to the United States and Europe. Even if not true, China’s economy is probably still growing overall and it is certainly growing in certain sectors and regions. And if the United States and China do reach a trade deal, things likely will start improving for China.
But in the meantime, our China lawyers get the sense that there is still a lot of money to be made by foreign companies in education, environmental cleanup and protection, and technology. And as will always be the case, if you have a better or cheaper (or better yet, a better and cheaper) mousetrap, people will buy it, in China and everywhere else. This is true of both services and products.
What are you seeing out there? Please tell us.
Update: Just saw (here) that Sony will be shutting down its China smartphone manufacturing in China, while leaving its Thailand plant open.
Update 2: Just got an email from a European milk company with a link to this article and the comment that the milk industry in China is doing great: Can the world quench China’s bottomless thirst for milk?