How does the financial crisis affect business in China?

There are two ways: through the trading route and through the asset route. If the US economy goes into a recession and reduces demand from abroad, China will have to cut its exports, causing it to be affected as well.

I think that effect will be estimate-able because we have had, as recently as 9/11 when the stock market and NASDAQ dropped by more than 50% and the overall market dropped by a third, a real recession. China’s growth rate had a very limited drop from 2000 to 2001 because its components are income-driven and driven by internal demand. Thus, when the US economy took a huge hit, China wasn’t greatly impacted. Their domestic growth is increasing faster than the overall economy and that is increasingly more important as a growth-driver.

Secondly, the types of commodities and products that China exports to the U.S. is not super-sensitive to the economic downturn. For example, Wal-Mart accounts for 12% of total imports from China — if Wal-Mart was a country it would be China’s eighth largest trading partner — to just give you a sense of what these exports are. They are not super-sensitive to economic downturns.

What is new this time is the asset market. In the center of Shanghai there is a block of very expensive real estate. Morgan Stanley invested early on and made a handsome profit on paper. But only recently have they decided to sell. So you can tell it’s part of the deleveraging process where they are selling assets in order to raise cash to reduce the debt burden on their balance sheet. They have to sell in overseas markets because they couldn’t sell their subprime assets after market liquidity completely dried up.

Now they are looking at their balance sheet, and suddenly those assets they hold in China become their most sellable assets. Because foreign investments in China are real [estate] assets and are relatively new phenomena, China doesn’t have any experience with the contagions of financial crisis through the asset sales channel. That is what is new and we will have to see what effect that will have.

Photo credit: Aapo Haapanen