Over the course of the current global financial crisis, there has been a perception in some circles that China will lead the rest of the world back into strong economic growth.
At first glance, this appears to be a possibility. In November, the Chinese government announced a disciplined and structured $586 billion stimulus package to boost the economy. A wide range of measures were implemented, including infrastructural spending and loosening of credit by banks, lowering of taxes and mortgage rates to stimulate property sales, and up to 10 percent subsidies for trade-ins for automobiles, white goods and computers. Results have quickly followed. In the first quarter, retail sales were up 15 percent, according to the National Bureau of Statistics. Industrial output grew by 7.3 percent in April, according to Xinhua, and China became, for the moment, the world's largest auto market. At the end of the first quarter the country experienced GDP growth of 6.1 percent -- not as high as in previous years, but steady nonetheless. Goldman Sachs projects that it will achieve 8 percent annual growth this year.
One key lesson of the crisis for China was the need to be less reliant on exports, and the stimulus package was aimed at shifting the economy from being export driven to domestically driven. The economic structure that is emerging from the ashes is a very different beast to the one that came before it. In April, China's exports fell 22.6 percent from a year earlier, an even bigger drop than the previous month, when exports dropped 17.1 percent. Imports in April also dropped -- 23 percent from a year earlier, according to The Wall Street Journal. Yet the Asian Development Bank projects that economic growth remains somewhere in the realm of 5-10 percent, so what gives?
The message here is that Chinese consumers are not going to come to the rescue of Western economies, but the continued growth means there is still great opportunity. The new-look Chinese economy is responding to government measures to crank up domestic economic activity, and will likely be more consumption focused than it has been in the past. What remains to be seen is if China is at the bottom of a V-shaped recovery, or at the cusp of a false dawn in a W-shaped recovery.
Understandably, many global companies have a serious case of the jitters when it comes to investing in this climate. Multinational companies in particular have been noticeably tightening their belts in China and many have been aggressive about cutting spending. Interestingly, their local competitors have not, and in some cases, domestic brands are jumping at the chance to invest and leverage the opportunities available.
It is important for multinational brands in China to remember the economic reality here is different to more developed economies, and perhaps more optimistic. For one thing, current estimates project that China will be the world's second-largest economy in five years. Therefore, staying committed to Chinese consumers should be a no-brainer, and it is certainly not the place to cut investments.
Continue to next page →