In Times of Recession - Look to the East. By Tom Jensen, Danish-Chinese Business Forum

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The Puzzle of Chinese GDP
Last year, reports were still concerned with the likeliness of Chinese economic overheating, following the fast-going Chinese economic motor. However, by October 2008, a sudden shock spread throughout the Chinese financial sphere, caused by concerns about declining growth. The World Bank announced on November 25 that the Chinese growth rate was likely to decrease to a total of 7.5 percent in 2009. If this turns out to be true, the Chinese growth rate will have dropped more than four percentage points, from a stunning 11.6 percent in the second half of 2007. This would be the lowest growth rate measured in China since 1990.
 
Chinese Crisis Response
The Chinese Central Bank coordinated its response to the financial crisis with its counterparts in Europe and the US. The stimulus package announced on November 9, 2008 shows the historic proportions of action taken by the government. The ¥4 trillion rescue plan is aiming to boost domestic demand through investments in a wide range of areas over the next two years (see table). Furthermore, the government is encouraging local governments to join in with additional public investments, and supplementary stimulus packages are expected to be implemented in 2009.

2009 Stimulus package (¥4 trillion / $586 billion)
Railways / Roads / Airports	45%
Disaster reconstruction (infrastructure)	25%
Farmers’ livelihood / Rural infrastructure	9%
Ecological construction	9%
Housing	7%
Innovation and structural adjustment	4%
Health care / Cultural / Education	1%

(Source: Handelsbanken Capital Markets)

Company-friendly Changes in Economic Sectors
Danish businesses with activities in China should follow closely the effects of the Chinese anti-crisis response, as many mechanisms are put in place to attract further investment from foreign companies.
    
1) The government’s package is followed up by loosened fiscal- and monetary policies directed at sustaining the growth, particularly through support to SMEs in the industry.
2) Recent measures include a reform in the VAT system, allowing foreign companies to deduct spending on investment. 
3) The government announced a cut in administrative fees in order to facilitate market entrance.
4) 2009 will continue the pattern in 2008 with further tax rebates in order to increase the global demand for Chinese exports.
5) Abolishment of trade restrictions on technology-intensive, energy-efficient and environmental-friendly products.

Additionally, many Chinese companies are lowering prices to attract attention of particularly outside investors in order to survive the ongoing lack of contracts. At the same time, the forecast of production stagnation has resulted in an important fall in raw material prices. Danish companies should look for improved investment and sourcing opportunities, as the Chinese interest in assuring new contracts remains high.

Sectors up for Grand Development
The grandeur of the scheduled domestic investments should attract the attention of Danish companies seeking to expand their market share. The break down of the stimulus package reveals strong potential within sectors including infrastructure, environmental projects, healthcare, R&D and investments.

Infrastructure: Although different reports vary in numbers (¥370 billion to ¥1.8 trillion), a major part of the stimulus package (up to 45 percent) will be allocated to infrastructure. Railways, highways, airports and subway lines around major cities are planned to shoot up in the near future. The immense need for railroads is emphasized by the impressive 100 billion USD, earmarked for the construction of railroads in order to meet the increasing needs. At the present time Chinese rail capacity only satisfies about 35 percent of the actual demand.

Petrochemical sector: In order to keep the development of the petrochemical sector steady, the Chinese government strives to fund further demand for petrochemical products. Additionally, more policy support through improved tax policies and reinforced credit access will be provided the sector in order to guarantee forward technological innovation and construction of further petrochemical projects.

Environmental projects: China now acknowledges the seriousness of domestic pollution. ¥350 billion will be invested in the construction of sewage and waste facilities, but also in an increased support to limit and improve energy conservation. Additionally, none of the funds in the package will be spent on energy intensive- and high-polluting industries. The new Chinese approach on how to improve energy consumption will without a doubt rely on foreign expertise. 

Research & Development: Where labor-heavy industries are vulnerable to foreign demands, the service industry remains a vital supplier to the society also in times of crisis. ¥160-180 billion from the package will be canalized into the support of research and development of the high-tech industry. The Chinese President Hu Jintao has since October 2007 made it his personal project to get the country started on a scientific development. Danish companies, with expertise in innovation and service sector activities, should take advantage of this new pillar of the Chinese policy. 

Healthcare: Many Chinese are reluctant to raise their consumption and prefer to save up for a rainy day. This is the result of insufficient welfare in the Chinese society. With the announced goal to improve people’s lives, ¥40 billion are to be invested in the healthcare sector by building hospitals and local clinics. Additionally, a reform in the social safety has been announced to fill out the gaps in low-income citizens’ access to treatment.

Retail: The support for personal wealth will empower the middle class and turn the Chinese society into the world’s biggest consuming nation, exceeding by far the present role of the US. As retail sales went up 21 percent in 2008 and continue to improve, the official Chinese plan to encourage domestic consumption will certainly shape a potential market.

China indeed remains an economy with great potentials, but it is likely to be overlooked if companies, due to the crisis, stay reluctant to grasp opportunities. According to a survey published on November 20 by KPMG, China is still the world’s best investment destination. 

The Beginning of a Long Engagement
The Chinese society surely is challenged by high unemployment and the economic unbalance between the regions. However, the Chinese stimulus package and the last months’ macroeconomic moves draw a clear image of the Chinese government facing the problems. Danish companies can profit from these massive Chinese investments. With a growth rate still well above 6 percent and an active engagement to guarantee at least an 8 percent growth through 2009-2010, China is far from the recession figures of the US and Europe. The government’s prospects of further Chinese stimulus packages can only strengthen this picture.

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