From the February 2012 issue of Treasury & Risk magazine

Change Grabs China

While financial liberalization makes it easier to do business in China, major economic, cultural and political shifts could alter its course.

China is in no danger of losing its position as the world’s factory floor anytime soon. But as it enters the Year of the Dragon—the fire-breathing mythical beast of the Chinese zodiac that can herald change and turbulence—the country is taking bold steps to internationalize its currency while facing headwinds of change on several major fronts that could drastically alter its course. The dragon, which symbolizes traits ranging from strength and self-assuredness to imperiousness and brashness, reigns from this January until Feb. 8, 2013, and appears especially apropos at a time when China faces an array of economic, cultural and political challenges—including a major change in leadership this fall —that could send the country in unexpected directions, not all of them positive for companies doing business there.

Those challenges include escalating prices and the resulting higher production costs, a real estate bubble and a shortage of credit. Costs, in fact, have been rising for at least a few years, prompting firms to look for alternative sources of production

Such governmental steps are essential, but companies and their bankers must also turn the changes into actionable strategies.

“There have been enough incremental changes and time for companies to digest them to cause a significant shift forward,” says Ron Chakravarti, managing director in Citigroup’s global transaction services unit.

D.G. Macpherson, senior vice president and head of global supply chain and corporate strategy at Grainger, a distributor of facilities maintenance products, says the company hasn’t experienced significant overall cost inflation on the products it sources from China. “To date, the cost increases we’ve seen have been very product-specific, with substantial inflation on some products and others holding steady,” Macpherson says.

Some multinationals are turning to suppliers in inland China, where inflation has been much less pronounced.

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