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Chinese firms’ new challenge: Sell to Chinese

Jack Yin and other factory owners find it's not easy to sell to their countrymen.

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Wooing China's Wal-Marts

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Big-box retailers like Wal-Mart do exist in China, but their numbers are small. Selling one’s products often means negotiating with countless small, local operators in second- and third-tier cities.

Hu’s problems are common ones, which will ultimately limit the extent to which China can turn from its export focus, says Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland in Hong Kong. For all of the hype surrounding the untapped China market, he says, there is no replacement for the mature, high-spending markets of America and Europe. “These export manufacturers are trying to sell to a market one-tenth the size of the foreign market and growing at half the rate. In short, I think companies will struggle.”

The government has been trying to reorient its focus to encourage domestic consumption, offering subsidies to rural residents who buy major appliances, altering tax rules, and easing loans to businesses to stave off more closures. Getting those new policies to effect actual change in companies’ strategies has been slow, says Lin Jiang, a finance professor at Sun Yat-Sen University in Guangzhou. “The government is pushing firms to explore the domestic market, but no one really knows how to do that, so it’s not so easy.”

In Dongguan, the center of the export industry in China, the government is also organizing huge meetings between large retailers and factories to encourage domestic sales, says Cai Kang, vice director of the Dongguan Bureau of Foreign Trade and Economic Cooperation. The first such meeting happened in June, with hundreds of factories from the city attending as well as huge buyers, such as Wal-Mart.

“We can’t say that all entrepreneurs will succeed in doing this,” Mr. Cai says. “Entrepreneurship is a very complicated thing.”

Trade implications

The degree to which China succeeds in this shift has large implications for international trade – affecting not only the degree to which companies can profit from the burgeoning Chinese market, but also trade deficits; the value of the dollar and that of the Chinese currency, the renminbi; and, ultimately, the role of China on the world stage.

The most immediate challenge is righting the serious US-China trade imbalance. As Americans bought Chinese goods with money they didn’t have, the Chinese government helped finance their borrowing by buying up huge amounts of US debt. Now, US consumers are tapped out and China is stuck with piles of US Treasury notes that it can’t sell very quickly without threatening the value of the dollar and, thus, its Treasury investments.

The way out of the mess, economists say, is for the US to begin exporting more and China importing more by concentrating on its growing domestic market. That way, both countries can grow while unwinding their debt imbalance.

Managing this transition well could lead to a healthier US economy and a much leaner China, making itself felt on the international stage as a taste-shaping buyer instead of a cut-rate manufacturer.

“With the global economy likely to keep treading water for the rest of this year, China is rapidly gaining relative strength,” notes a recent report by the Boston Consulting Group. “The new Chinese economy will be less trade dependent, but it will be more competitive in global markets than ever before.”

At Bath Concept Cosmetics, business is already starting to pick up as the Chinese discover high-quality hair salons and the economy picks up. Yin smiles when asked about the challenges ahead. “In two to three years,” he says, “we’ll be famous.”