China’s new normal

marathon

Foreign companies doing business in China are in for a gut check.

It’s never been easy for multi-national corporations (MNCs) to do business in mainland China, given the byzantine regulatory environment and home field advantage.  Nonetheless, MNCs have slogged on with varying degrees of short-term success, lured by the tantalizing prospect of transformational profits in an “unlimited” potential market of more than 1.3 billion people.

Chinese players – whether political or corporate or politicorporate – have always been adept at hyping this potential:  allowing foreign companies to enjoy limited wins (in the guise of progressive steps on a limitless journey, such as the increase of foreign film imports from 20 to 34) while simultaneously gaming the impatience of outsiders (especially those who amusingly regard themselves as “patient”).  China is all about the Long Game, and the Long Game is inherently Chinese.

On July 7th, China’s Xinhua news service published an editorial admonishing foreign businesses in China to “put their victim mentality to rest for good and embrace new rules set to protect their own interests in order not to miss the boat as the Chinese economy matures”.  This in response to multi-national corporations’ concerns over a new Chinese national security law expanding China’s legal reach to nearly every aspect of public life and enforcing China’s ability to examine foreign players for potential national security threats.  Although the Xinhua editorial cited analogous foreign investment and national security legislation in Western countries, many foreign companies nonetheless regard the new Chinese law as underscoring a worsening mainland business climate characterized by rising business costs, underwhelming profits and vulnerable intellectual property.

China has grown in power, influence and confidence within a remarkably short period of time.  Among President Xi Jinping’s extensive political, social and economic reforms is his mission to lead China to a “new normal”:  a less overheated, more stable, consumer-driven market.  This sounds well and good on the face of things, but as Xinhua editorializes:

“For decades, foreign investors have reaped handsome profits from one of the world’s fastest-growing economies while sitting on cheap labor, generous consumers and a “super national treatment” that includes hefty and exclusive tax breaks.

These have prompted many to feel entitled to favorable policies while on Chinese soil, and to play the victim card in order to continue to press for advantageous accommodations in the face of rising labor costs and when authorities try to treat them as the equals of domestic firms.

But it is only logical that when the economy grows, so do labor costs. In addition, as China continues to adjust its market economy, equal treatment for domestic and foreign firms has become an irreversible trend. The lenient policies of yesterday have worn out their usefulness, and foreign companies should keep that in mind.”

In other words:  you’d best come correct and manage your expectations.

To make matters worse, foreign companies must re-evaluate their commitment to the Chinese market at a time when actual revenue potential is no longer “unlimited”.  Nearly 1,000 of the approximately 2,800 companies on the Shanghai and Shenzhen stock exchanges have either suspended trading or applied for trading suspension in the midst of the current Chinese stock market crisis.  As of this past Monday, Bloomberg reported that over 20% of China’s market capitalization ($1.4 trillion USD) had been frozen, with $3.2 trillion USD in market value lost and the balance sheets of Chinese securities brokerages & banks on dangerous ground.  China – the nation to which the world desperately pinned its hopes in the wake of the global economic crisis – now indeed finds itself facing a “new normal”.

The Xinhua editorial concludes that “financial input from overseas and expertise in the process will be welcome, and the restructuring also means new business opportunities for foreign firms”.  I have every reason to believe that this will hold true for MNCs in the short term.

The billion-dollar question is which foreign companies will have the guts and the guile to make the most of a “normal” China.

 

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