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Tuesday, October 26, 2010

DOING BUSINESS IN CHINA: China Raises Key Interest Rate: Opportunity or Worry?

Doing Business In China with Dan Paulson

The world’s largest emerging market is taking steps to slow growth and curb inflation. How will it impact you?

In October, China raised a key interest rate for the first time in three years. This came as a surprise to the economic community considering the impact it could potentially have on world markets. For China, it is a step to slow the lending process after a recent spike in lending both in China and other nations.

So how will this impact you? Well, it may not. In fact, opportunities still exist for the right products and services in China. Businesses with unique expertise or technology will still see potential for growth in China regardless of the increase in rates. In fact, many US investors are borrowing money here and investing in China at the increased rates.

While the increase has led to a great deal of speculation, it is truly hard to say what impact if any this will have on the world market in the short term. What is important to understand is why China may be doing this now. There are a couple of reasons.

First, such rapid growth that China has been experiencing could prove unstable over time. China has been raising the capital reserve requirements for banks in order to reduce the cash to the economy. Raising the interest rates is just another step to controlling cash flow. Real estate is a hot market in China right now and there are concerns about China’s own housing bubble.

Second, China wishes to provide greater valuation for the Yuan. A negative interest rate has existed for several months and China’s population, most of whom save at least 45% of their income; wish to see a greater return on their savings.

Third, airfreight capacity coming out of China is almost fully booked through the end of December. The Central Bank could see this as a sign of a strengthening economy and are expecting the trend to continue. What’s uncertain about all this is what exactly will happen in 2011. There are concerns that retailers are merely stocking up for the holidays and filling inventories that have been kept low over the past year.

The reality is for many businesses; this modest increase will probably have little effect at this time. There are still plenty of opportunities in China. Right now, needs are still strong for green technologies, services for sustainable energy and water quality, and management services just to name a few. If you are interested in international expansion, it is important that you educate yourself on the financial impact of the decisions you make. Get help from someone who has experience in international business and they will help you work through these uncertainties no matter how big or small.

For more information, please visit Dan's TNNWC Bio.

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