Supply Chain

China’s Instability Offers Opportunities

Despite political turmoil and scandal, and slowing economic growth, businesses should still be bullish on China, says Ted Fishman.
Vincent RyanOctober 29, 2012

MIAMI — Don’t give up on China, despite its short-term political and economic difficulties. So said Ted Fishman, author of China, Inc., How the Rise of the Next Superpower Challenges America and the World and former Chicago Mercantile Exchange trader, at the CFO Playbook for Private Companies conference here Monday.

“China is feeling rocky right now” because of economic and political developments that pose risk for businesses both inside and outside China, Fishman said. For the seventh quarter in a row, China’s gross domestic product is down, and in the third quarter it posted the lowest growth in 13 years (7.4%), largely because of state investments in building airports and apartment housing. Further, China’s currency, the yuan, is up 40%, and wages are inflating at a rate of 12%, putting a strain on the economy, according to the author.

Recent political developments in China may make it even tougher for foreign firms to invest in the country, said Fishman. The nation’s 18th Party Congress starting November 8 could produce fights among different factions over key government posts, positions that have an effect on business in China. “We could get [another] long period of political purging dressed up as reform,” said Fishman.

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State-run companies are also reasserting themselves in Chinese markets, and that’s causing some companies in the United States and elsewhere to retreat or ratchet down investment. If U.S. companies pull out entirely, however, they could lose big opportunities to companies from other countries, said Fishman, noting that’s what happened after student demonstrations rocked Tiananmen Square, when Americans withdrew and Indonesian companies seized market share. “Sometimes crisis in China is an opportunity to get in when others are heading for the door,” he said.

Despite all the short-term negatives he sees for U.S. companies seeking to do business in China, Fishman is clearly bullish on the country long-term “because of the big trends, because of the demographic story, not market reforms.”

Among other things, that story is about young people moving to urban areas to meet the vast amounts of capital that have flowed into China in the past few years. Chinese economic growth has allowed Chinese parents to invest in their children’s education, which leads to a growth in the middle class and domestic consumer consumption.

The other thing businesses should note about China is that an aging population is leading to labor constraints, despite the boom in university graduates. Fishman said he heard from an Indonesian official that Chinese planners expect domestic firms to outsource 85 million jobs to Southeast Asia in the future, with the lion’s share likely to go to Indonesia.

“If thinking about investing in China makes you nervous, think about investing in the places China is changing,” Fishman advised.