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Tough times ahead for local firms

By Xiao Xin (China Daily)
Updated: 2008-11-18 08:05

Chinese companies face difficulties over the next two years because of the global economic slowdown and rising prices, business leaders said on Saturday.

The real estate industry is one of the worst hit sectors. One-third of property developers have investments in the stock market which has seen a decline by more than 70 percent since its peak in October last year.

The prediction is based on a survey of 5,920 businesspeople conducted by the State Council's Development Research Center, the National Bureau of Statistics, and other major agencies.

The best strategy for companies is to hold on to cash, business leaders attending a seminar on the release of the survey, said.

The global economic slowdown, worsened by the US financial crisis, has led to reduced demand for Chinese exports. This is coupled with the appreciation of the yuan and rising costs for labor, land and raw materials.

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Those most affected are small companies in the coastal areas.

Fifteen percent of those surveyed said their businesses had stopped all or most production activities, an increase of 7.4 percent from a year ago.

The yuan has appreciated by more than 20 percent against the dollar since July 2005, when the country depegged the currency from the dollar. If it appreciates a further 5 percent, 62 percent of those surveyed said it would deal a major blow to them, an increase of 10 percent from a year ago.

Companies have reduced funds in research and development and become more prudent in their investments, the survey said.

About 30 percent of respondents felt the situation would improve in the next few years while more than 14 percent felt it would get worse. The gap is the narrowest in five years, indicating growing pessimism as the Chinese economy slowed to 9 percent in the third quarter from 11.9 percent last year.

"As the economy slows, people will opt not to invest, and this could further effect the situation," Dong Xian'an, an analyst with China Southwest Securities, said.

The key to China's economic recovery is corporate investment and consumption. The effect of the massive 4-trillion State stimulus package introduced this month will be weakened if businesspeople do not invest, Dong said.