S0 - You want to Outsource to China...Part 1

by: Alexandra Damsker

Costs are high, profits are dropping, and you’re considering outsourcing some or all of your business production to China. Is this a good idea for you? While the outsourcing party used to be more of a free-for-all fête to pare down costs, it’s now more of a selective affair. Trends are changing, particularly with China, though it remains a massive global economic engine, powering the bottom line of companies both in the US and abroad. Labor is cheap, but getting more expensive - the 2008 labor law ending termination “at will” has increased both costs and risk - and product liability risk and quality control have yet to have a fully restored reputation from recent setbacks. Global economics and the value of the dollar have been making the US and other countries, such as India and the Philippines, more viable alternatives. However, costs in China are still comparatively low, and China has a well-established outsourcing system and infrastructure that’s relatively “turn-key” for companies operating with knowledgeable advisors. What’s more, the economy is now opening China up to companies it’s never been open to before, including smaller companies and reduced orders.

So how does this shake out in terms of shipping your goods or services off to China? Well, some industries are growing wary. In BDO Seidman’s excellent 2009 Technology Outlook Survey, for example, 62% of CFOs at leading US technology businesses reported that the US would be their primary outsourcing destination in 2009 (16% reported China as leading destination in 2009, 13% reported India, and 19% reported no interest in additional outsourcing - reflecting a likely decline in international outsourcing). The study also reported that outsourcing to China is down from 46% in 2008 to 19% in 2009. (Get a better look at the survey here: http://www.bdo.com/news/pr/1016.)

However, while technology and IT, including call centers, are coming out of China, industries and company functions with high capital costs are moving to and remaining in China. Examples of both include the pharmaceutical industry and manufacturing functions, both of which are expected to maintain current levels or rise in the upcoming year. In addition, China is rising as the new head of clinical trials in Asia. (Check out this great article on pharmaceutical trending for more information on that topic: http://trendsniff.com/2008/11/06/china-numberone-destination-in-asia-for-pharmaceutical-outsourcing/.)

Our next blog will look at the complicated process of outsourcing, to give you a better idea of what to expect. Our experts at the USA China Law Group are happy to discuss whether outsourcing is a good fit for your company, and if China is a good partner country for you.

China Wants to Globalize the Yuan

05/01/2009 by Edythe Huang

Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide.

The latest blast from Beijing in March: a call by China's top central banker, Zhou Xiaochuan, to replace the U.S. dollar with a new global currency.

Zhou: reserve currencies based on a single issuing country just doesn’t work:

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.

The goal, Zhou writes in a paper released on the website of the People’s Bank of China on March 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.

The idea of an international currency is worth considering. We have a global economy. To facilitate trade, we need an international currency. Zhou’s argument is basically how can we have a truly global economy without a global currency.

Notwithstanding the apparent logic of this argument, the global consensus is the U.S. dollar will not be replaced by an international currency or any other currency including the renminbi in the near future. Here’s why:



First, the U.S. will not give up the U.S dollar’s status as the dominant global currency without a fight. Speaking on March 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geitner and Federal Reserve Chairman Ben Bernanke both stated on the record they categorically oppose any change in the status quo. Later that day President Obama in responding to Zhou’s “suggestion” to replace the U.S. dollar with a SDR stated, “I don’t believe there is the need for a global currency.”

Second, the U.S. dollar is already established as a the global medium of exchange. Any unseating of the U.S. dollar would signal the end of the U.S.’s stature as the world’s supreme economic power. It would also destabilize the world’s economy given the trillions of dollars of foreign investment in U.S. government securities, the largest current investor in those securities being China.

Third, the most likely successor to the title of global currency is the renminbi. However, the consensus of both Western and Chinese analysts the renminbi is significantly undervalued and China’s financial markets and banking system will not be sufficiently “mature” for the renminbi to be a viable contender for this title for at least another decade.

Notwithstanding these facts the Chinese are uncomfortable holding U.S. dollar denominated foreign reserves and debt. Taxi drivers in big cities such as Beijing and Guangzhou no longer accept U.S. dollars as they did only a year ago. Many Chinese people are looking for alternatives. Maybe they will learn from Jim Rogers, who walks around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.

Life in China is Back to Normal

May, 2009 - By Julia Zhu

No matter what you read in local or international newspapers and magazines or see on TV you will inevitably find economists stating that the “leading indicators” reflect the direction of the world’s markets.

Some economists state the world economy is getting better, while others opine it is going to get worse before it gets better. The data relied on by the economists for these diverse opinions are: the GDP of the world and the component nations, consumer price indexes, commodity prices, foreign exchange rates, etc. No matter what their opinion is at this time they are all anxiously anticipating the upswing.

China remains optimistic. U.S. Secretary of State Hillary Clinton was in China in February of 2009 on the last leg of a four country tour of Asia focused on the global economic crisis. Gallup Polls conducted throughout 2008 reveal the Chinese were more optimistic about their economy than the other three nations she visited. Earlier this month, Wen Jiabao, the Premier of China publicly stated China’s economy is doing better than expected. Zhou Xiaochuan, the governor of the People's Bank of China, said last week there have been positive changes in the Chinese economy in the first quarter of 2009.

However, given concerns about the accuracy of economic data in China I have a personal economic indicator which is similar to The Economist’s “Big Mac” index.

I am currently staying in Guangzhou on business. Guangzhou is a sleepless city where construction cranes have been the predominant feature of the skyline for years. However, the city was oddly quite around the Chinese New Year in late January when I happened to be in the same area of the same city, and it seemed it had been like that for a while. I saw blue sky. I didn’t see many people or cars out during the night. What was wrong with that? Dust, dirt, noise and crowds are good –they are signs that things are happening!

Over the past a few weeks, things seemed to be changing whichresulted in my discovery of the perfect indicators we are on the upswing in China which I call the weekday bed time and weekend wake-up time. The louder the noise from construction, crowds and cars is around me, the earlier it starts and the later it ends, the earlier I wake up and the later I go to bed. It works really well. I have become an early bird even if I still stay up late. I am happy more often than I am sad. It just means that life is returning to the normal bustling status we have become accustomed to in China in the past twenty years.

I have determined we do not need complicated economic indexes and financial data to determine how the economy around us is doing. We just need to be aware of what is happening around us.