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No Longer Advantage To Doing Business In China: Source

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The timing of the 2007 to 2009 financial crisis and recession couldn’t have been better for China. The Chinese economy was just revving up to speed, but it only had tenuous connections with the U.S. and European economies at the time, so it was largely shielded from the cascading economic effects of the crisis.

According to multi-asset research firm Source, the financial crisis created a major “growth gap” between the Chinese economy and that of most of the rest of the world that has taken a number of years to gradually whittle down. That’s why companies focusing on China did so well relatively speaking in the aftermath of the crisis and the ensuing Great Recession.

Source’s Paul Jackson and András Vig explain their perspective: “No matter which scenario is favored, one thing is clear: the growth gap seen around the time of the financial crisis was exceptional. It will likely be decades before such an advantage accrues to companies favoring business with China over that with the US. Sectors such as autos and financials appear expensive to us (see Source Sector Selector) and China is unlikely to work in their favor for some time.”

No more advantage to doing business in China

Figure 1 in the Source report makes it clear that the advantage of doing business with China is less today than it was a few years ago. Based on IMF data, the gap in contribution to global GDP growth from China that opened up will disappear completely in 2016 and then open again a few years later.

Jackson and Vig also point out that since China ranks 90th in the World Bank Ease of Doing Business report, it is highly probable that business undertaken in or with China is more difficult and/or less profitable than business done with the U.S. at 7th in the rankings. That’s why it is not that surprising that a growing number of public firms are pointing the finger at China to explain their weak sales and earnings performances.

China

Finally, the Source analysts argue that changes in currency values are unlikely to accrue much of an advantage to China over the near-term, as the recent decline in currency reserves does not actually reflect anything more than a notable strengthening in the dollar over the last year or so.

Although Source does not mention this, costs have become a key issue. As predicted for a while, labor costs in China are starting to become noncompetitive.

Finally, Source has an interesting analysis of the debate on USA vs China GDP. They note:

Starting with 2014 data, if US nominal GDP grows by a constant 4% per year and China grows by 6% per year (in USD), China will overtake the US in 2042 and the $800bn per year gap will re-appear in 2040 (and grow thereafter). If, on the other hand, China grows by 8% per year, it will overtake the US in 2028 and the $800bn gap will occur again in 2026.

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