Thursday, March 24, 2011

Chinese check-in

A high-level conference on Asian opportunities drew plenty of investors, bankers, portfolio managers and other financial experts to New York yesterday morning. Too bad there wasn’t a restaurant-chain executive among them.

Today, that lone soul would understand the profound economic changes afoot for China, undeniably the restaurant market of choice right now. When the dislocation hits, and peers scramble in panic, the attendee could sit back, pour another cup of coffee, and relish knowing the downturn might not be so bad for the foodservice business.

Any U.S. chain with a presence in China has probably heard the dire predictions that were explored in depth yesterday. There’s a consensus that China’s torrid economic growth can’t be sustained. At the very least, there’s the risk of steeper inflation. There’s also the not-so-little matter of pushing the environment past the point of recovery. And other nations will surely look to curb unfair advantages like the lax enforcement of intellectual-property rights, or what one speaker euphemistically deemed “the migration of ideas.” Counterfeiting is huge there, and corruption is still a common practice in some areas, as one panel noted.

But the real sand in the gears, several speakers noted during the Asian Century Forum, is the unique imbalance of China’s economy. Here in the States, most of our economic activity takes the form of consumption—people, businesses or governments buying things.

In China, most of the Gross Domestic Product is generated by investment—the capitalization of factories and other means of producing products. Consumption accounts for less than 40% of China’s GDP, as one speaker noted.

The reason, Asian authority Michael Pettis explained, is the low buying power of Chinese workers. Output has exceeded wage growth, yielding more and more goods and services, but insufficient wealth to buy them. And it’s all the result of a government-controlled economy.

Pettis, a professor of finance for the Guanghua School of Management at Peking University, said the strange situation will probably prevail for some time to come. He expects a new five-year growth plan to revealed by the government next month, and doubts there’ll be any component to boost consumption.

The nation can’t stay on that course without risking social and political upheaval, other speakers suggested. More emphasis will have to shift to consumption and growing household income at one point or another.

Before the imbalance is righted, Pettis said, the economy will gag more than hiccup. “We should be prepared for a growth rate in China of three 5%. The days of a 10% growth rate are over,” he predicted, dropping what may have been the conference’s biggest bombshell.

A slowdown in the economy would no doubt be chilling for chains like Starbucks and McDonald’s, who have factored a penetration of China’s emerging consumer market into their near-, mid-, and long-term growth strategies.

I bet that Yum! Brands, parent of KFC and Pizza Hut, wouldn’t mind selling those brands’ U.S. presence to focus more resources on their expansion in China, where both are market titans with a jetpack on their backs. The franchisor already has a brand that operates only in China, East Dawning, and has an investment in a second, Little Sheep Hot Pot.

Halving China’s economic growth would have to be a serious worry to big U.S. operators like those. But, as attendees learned yesterday, the drop-off would be the price for shifting more of China’s economy to a consumption base. The emphasis would be on raising workers’ wages and household income, fostering a larger middle class.

For restaurants, that means putting more money in the pockets of consumers with a hunger for American culture, including its fast food. It’s a silver lining that was mentioned repeatedly yesterday.

Too bad no one from the industry was there to hear it.

Full disclosure here, as per the FCC’s blogging regulations: I was paid to live-blog and tweet from yesterday’s Forum, which was co-sponsored by the Paul Hastings lawfirm and the Financial Times. You can review the highlights here.

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