New Report Identifies Major Exposures, Provides Guidance on How Companies Can Plan for the Best and Prepare for the Worst
A new report from The Conference Board warns that global firms face significant exposure risks stemming from China's global economic and financial integration.
“China exposures” are the positive or negative impacts that China-related developments could have on business. They are both unintentional—the inadvertent consequences of changes in China’s economic conditions—and intentional—the result of China’s national and global economic initiatives.
Businesses around the world are often blindsided by these impacts because (1) China’s economy is difficult to read, (2) transmission channels are poorly understood, and (3) the resulting exposures can be both direct and indirect. The report emphasizes that whether or not multinational companies operate there, China factors will inevitably impact their business. Executives need to understand the gamut of potential China exposures, so they can position their companies to exploit associated opportunities and mitigate risks.
“Global China exposures for national economies, MNCs and financial institutions are numerous, and they are intensifying in terms of reach and magnitude,” said David Hoffman, Senior Vice President, Asia Pacific and Managing Director of The Conference Board China Center. “Many business leaders intuitively grasp, and continually assess, their respective business exposures related to market, economic or political conditions or unfolding events inside China itself. However, there persists a critical gap in understanding by global businesses and financial institutions regarding China’s probable and plausible impacts on the global economy and the business environment outside China.”
China’s Initiatives on the Global Stage
China’s economy, the world’s second-largest, is deeply connected to global trade and investment. China has initiated a wide range of ambitious global development projects that bear watching for their impacts on regional economies and businesses. Examples include:
- The “One Belt, One Road” (OBOR) initiative could significantly alter supply-chain economics and national competitive dynamics in Asia by either creating a new set of emerging markets in Central Asia, Indochina, and the Indian subcontinent or creating a set of dependency risks across these regions if large-scale projects fail or cause political or social instability.
- Development aid programs in Africa or the Middle East could enhance economic prospects in these regions, or, if governance failures occur, further weaken political and institutional foundations.
- High-speed rail, nuclear, and civil works exports could provide much needed infrastructure to reignite stagnant growth in advanced markets, but they could lead to instability if quality standards aren’t met or financing arrangements prove to be commercially unfeasible.
- China’s engagement with key international economic institutions—e.g., the IMF, the World Bank, the Asian Development Bank—and the promotion of new adjunct institutions it has founded could positively impact current institutional systems in need of renewal, or it could upend these systems by virtue of China’s different approaches to independence, intellectual property, transparency and rule of law.
In addition, there are many other China exposures that do not register on the dashboards of senior executives even though they could exert significant effects on local markets across the world. These include impacts on real estate, tourism and talent flows into international labor markets.
Looking Ahead: Planning for China Exposure
For near- and medium-term planning purposes, the exposures The Conference Board considers highly plausible and most important for the C-suite and strategy functions to consider include:
- A more significant GDP slowdown in China than is currently anticipated and its deflationary impacts.
- Defaults of Chinese loans and bonds held by international commercial banks and sovereign central banks.
- Significant deterioration in geopolitical relations between China and its key economic partners.
- Dramatic new volatility in the value of the RMB, or a major retreat in the RMB internationalization program, and the surge in outflows that could overwhelm monetary environments in recipient markets.
- Unexpected demand-side shifts in China’s domestic market—in the consumer, industrial or commodity space—whether positive or negative.
- Retaliatory trade and investment policies undertaken by Beijing in the event of more stringent treatment of Chinese international players and exporters by Western capitals.
- Substantial investment projects along the OBOR region and the opportunities/risks that they present—along with the (less likely) long-term changes they may induce—including medium- and high-speed rail in Southeast Asia and Africa, port build-outs in South Asia and Africa, the China–Pakistan Economic Corridor, energy infrastructure in Central Asia and Southeast Asia, and general “special economic zone” construction across the entire region.
- Global market disruptions caused by newly competitive and strongly supported Chinese digital industries, resulting from the Made in China 2025 domestic initiative.
- Volatility in outbound Chinese capital caused by opaque and unpredictable capital control regimes, and the strain they inflict on MNCs’ ability to repatriate cash.
The report recommends a two-pronged approach in preparing for these exposures:
- A deep understanding of China’s economic condition and its likely future evolution is crucial. Dedicated resources, internal and/or external, should be assigned to this task. Knowledge about the channels through which domestic events in China can spread abroad and impact business operations is critical.
- Chinese outbound projects should be monitored for potential company-specific business impacts. MNCs must assess whether project funding from China and its partners is likely to materialize and, if so, whether a given host country is likely to follow through on the project in question.
Source: China’s Global Impact: The Business Exposures and Economic Implications of a Globalizing China
The Conference Board
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