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The financial crisis that started in the United States is spreading worldwide, and its impact on Chinas economy is increasing daily. Difficulties and problems that accumulated in Chinas long

period of fast economic growth have gradually become apparent. Both the Chinese government and enterprises are considering how to transform and upgrade Chinas economy through changing

development mode and adjusting the industrial structure, while coping with the financial crisis. Therefore, guaranteeing economic growth, expanding domestic demand and making structural

adjustments have become Chinas important economic goals for 2009.

In order to realize these goals, the Chinese government has created a RMB 4 trillion investment package and launched a revitalization plan for 10 key industries, hoping to move from a reliance on exports to stimulating greater domestic demand.

Consumption Coupons: New Attempt to Expand Domestic Demand

THE global financial crisis has exerted pressure on exports and employment, and has influenced Chinese peoples income level and will to consume. To increase domestic demand, some local governments have tried to stimulate consumption through issuing consumption coupons.

Stimulating Consumption by Issuing Coupons

On March 7 more than 10,000 tourists visited Fujiabian Sci-tech Garden in Lishui County, Nanjing City, Jiangsu Province, which is a bio-agricultural tourist destination. This brought the garden an income of RMB 200,000, an increase of 30 percent over the same period of 2008. The garden received RMB 10,000 worth of consumption coupons, a result beyond the expectation of general manager Li Baijian.

The garden benefited from the Nanjing governments issuing of Nanjing rural tourism consumption coupons in February through a random lottery. The lucky winners each received a coupon worth RMB 100.

To promote the rural tourism market, the Nanjing municipal government earmarked RMB 20 million for rural tourism consumption coupons to be issued among inhabitants across four months. These coupons can be used at 37 tourist destinations. According to initial government estimates, the RMB 20 million-worth of coupons will generate consumption of RMB 200 million.

The issuing of consumption coupons is not just restricted to Nanjing. Before the Spring Festival, Hangzhou City in Zhejiang Province issued consumption coupons worth RMB 200 million. Wang Guoping, top leader of Hangzhou, said, “The most important task at present is promoting consumption. The consumption coupons have benefited 1.32 million people. Practice has shown that this is a good move.” On February 17, Wang Guoping said that Hangzhou would again issue consumption coupons worth RMB 1 billion, in areas including tourism, training and education. Meanwhile, the government would also issue consumption coupons that Hangzhou inhabitants can voluntarily purchase.

Hangzhous issuance of consumption coupons has won support from the Ministry of Commerce. Jiang Zengwei, deputy minister of Commerce, said that the coupons have promoted consumption. According to statistics, RMB 1-worth of coupons can generate consumption worth RMB 2.06.

This affirmation has aroused the enthusiasm of various localities to issue consumption coupons. Since then,Jiangsu, Hunan, Sichuan and Shandong provinces have followed suit, issuing consumption coupons worth over RMB 2 million.

Popularizing Coupons Nationwide?

Issuing consumption coupons is one of the economic policy tools to stimulate consumption. When economic depression causes peoples consumption capability to decline, the government issues consumption coupons to be used as an instrument of payment, hoping to revitalize consumption through increasing peoples purchasing power and consumption desire, so as to promote production and investment activities and speed up recovery of the economy.

Liu Hanyuan, a member of the Standing Committee of the National Committee of the Chinese Peoples Political Consultative Conference (CPPCC), was the first to advocate the issuing of consumption coupons among the populace. He said, “Consumption coupons give consumers greater payment ability and enable them to turn consumption desire into purchasing behavior, hence accelerating the recovery of consumption confidence and ability, and expanding domestic demand immediately. Manufacturing and processing enterprises especially gain more income and profit, and so invest more in production, directly promoting employment and increasing governmental tax income. This creates a cycle that will bring Chinas economy back on the fast track of development.”

During the 2009 session of the Chinese Peoples Political Consultative Conference in March, Liu Hanyuan presented an overture entitled “Effectively Generating Short-term Domestic Demand Through Issuing Consumption Coupons.” He suggested that to effectively boost peoples confidence in consumption, the government issue consumption coupons worth RMB 1,000 to every Chinese citizen, in four batches. He believes this is the most direct and effective way to stimulate consumption.

Liu Hanyuan drew inspiration from the experiences of Singapore, Japan and Chinas Hong Kong, Macao and Taiwan, whose “red packets” have an instant effect on consumption.

Will consumption coupons be popularized nationwide? Chen Deming, minister of Commerce, said that the ministry would track the effects of consumption coupons. The central authorities are studying the feasibility of issuing nationwide consumption coupons, hoping to stimulate peoples purchasing desire, revitalize tourism and alleviate pressure on people who have difficulties in their lives. Policy readjustments will be made after an evaluation.

Solving Difficulties Through Development

Figures from the National Statistical Bureau show that the Consumer Confidence Index in China hasbeen in decline since January 2008. According to Nielsen data, more than 60 percent of the populace believes that income levels will be the key factor limiting consumption in 2009. With domestic enterprises decline in economic performance, their ability to invest and expand has been affected, resulting in a reduction in supply and rising prices. This in turn will make consumption shrink further, forming a vicious circle.

“Only by solving the present problem of low consumption in the coming six months to a year, and by expanding domestic consumption, will the RMB 4 trillion investment be sustainable, and bring its multiplier effect to full play,” said Liu Hanyuan.

“At present, various localities are issuing consumption coupons and tourism coupons on a trial basis. I think all these can be tried,” said Huang Qingyong, a member of the National Committee of the CPPCC and deputy secretary general of the Guangdong Provincial Committee of the CPPCC. The aim of issuing consumption coupons, tourism coupons and car coupons is to boost peoples consumption confidence, so that people are willing to spend money.

“Issuing consumption coupons is a special means adopted in a special period, not a long-term policy,” said Cai Qi, mayor of Hangzhou City and a deputy to the National Peoples Congress. Using consumption coupons aims to make use of their multiplier effect and promote consumption. It is not a form of protectionism. After all they make up only a tiny share.

Cai Qi said that issuing consumption coupons is an effective way of expanding local consumption. According to calculations, when retail sales of Hangzhous consumables increase one percent, it brings an increase of 0.56 percentage points in local GDP.

Cai Qi also said that issuing consumption coupons is only the beginning of stimulating consumption and expanding domestic demand, and that the ultimate solution to various problems is dependant on development. “To develop, we rely on industry and services. It is right to promote investment and consumption, but what is more important is to rely on enterprises, which constitute the main force of the market in coping with the challenges of the financial crisis. At this moment, the government should stand together with enterprises to bridge difficulties.”

Logistics: Part of Overall Revitalization

THE distance from Guangdong to Jiangsu and Shanghai is about 1,800 kilometers. Everyday Xu Haos Longnan Logistics Company transports 10 truckloads of goods. One truck carries more than 30 tons of foodstuffs or cosmetics valued at RMB 500,000-1 million, earning a profit of tens of thousands of yuan. “It is slack season now,” said Xu Hao. In the busy season from Mid-Autumn Festival to Spring Festival, his company transports an average of 15 truckloads of goods per day.

With many years experience in the logistics industry, Xu Hao has accumulated a large number of clients. In 2009, he has obviously felt the impact of the global financial crisis, since his business has shrunk by one fourth. Xu Haos company is a medium-sized logistics company in Shantou City, Guangdong Province, with more than 100 trucks. But competition is fierce. He told this reporter that there are several hundred similar companies in Shantou.

“It is beyond my expectations,” said Xu Hao after hearing about the approval of the inclusion of the logistics industry on the list of the 10 key industries in the revitalization plan by the State Council. “I hope this will give the logistics industry, which is in a difficult situation, opportunities to readjust and reorganize.”

The Revitalization Plan

“As an important branch of the service trade, the logistics industry is not only an important link between the nine key industries of iron and steel, automobiles, shipbuilding, petrochemicals, textiles, light industry, non-ferrous metals, equipment manufacturing and IT, but also an important link between these industries and domestic and international markets,” explains Liu Tienan, deputy director of the National Development and Reform Commission.

This assessment warmed the hearts of logistics personnel experiencing hard times. The logistics industry has felt the direct and obvious impact of the financial crisis. The bankruptcy of Shanghais Yitong and Guangdongs Xiangying Express are examples. ZJS Express, a domestic private express leader, has also been cutting staff, since its business growth has slowed from 40 percent to 15-20 percent.

According to statistics of the China Federation of Logistics and Purchasing (CFLP), in 2008 Chinas logistics volume totaled RMB 89.89 trillion, an increase of 19.5 percent year on year, but a drop of 6.7 percent in growth speed. According to Wang Zuo, deputy president of China Society of Logistics, at present more than 40 percent of the logistics enterprises report decreases in profits or even operate at a loss. In certain areas medium-sized and small logistics enterprises have begun to quit the logistics market.

“Even though we wont see the effect immediately, we are gratified that the logistics industry has been identified as a key industry to be revitalized and its importance in economic life has thus been emphasized,” Xu Hao told this reporter.

Like other branches of the tertiary industries, for a long period of time the logistics industry has been suffering “trade discrimination.” “In the eyes of many people, the logistics industry is doing nothing but transportation,” complained Huang Wei, deputy president of Shunfeng Express. Before the promulgation of the revitalization plan, quite a number of people said that the probability of the logistics industry being included in the plan was low, due to its small overall scale and its minor role in stimulating the economy.

Is the logistics industry merely transportation? Li Yining, dean of the Peking Universitys Guanghua School of Management, commented, “The logistics industry has extensive functions, including the distribution of goods, chain operations, pre-production and after-production service, processing for export, storage and transportation, and E-business.” Professor Li Yining holds that this industry can provide many jobs and play a big role in promoting production and stimulating consumption.

Furthermore, Li Yining also holds that the logistics industry is a basic industry that serves other trades and is of vital importance in improving the performance of the entire economy. However, the domestic logistics industry is backward, and lags far behind developed countries in both facilities and management. Chinas logistics expenditure takes up 18 percent of GDP, while the figure in the United States is less than 10 percent. Management cost makes up 12 percent of the total logistics expenditure, while in the United States this figure is less than 5 percent. Therefore, it is in time to launch a revitalization plan for Chinas logistics industry.

Building a Modern

Logistics Network

The urban logistics system needs revitalization, while the rural logistics system needs pioneering development. According to the Readjustment and Revitalization Plan of the Logistics Industry, the government will adopt four measures to develop the logistics industry, including “strengthening construction of logistics infrastructure facilities, and raising the standardization and informatization levels of logistics.” It emphasizes promoting the development of logistics in key areas such as agricultural products and medicines.

“Building a modern logistics network covering both urban and rural areas is an organizational guarantee to stimulate domestic demand and expand consumption,” said Zhang Zhigang, a member of the National Committee of the CPPCC and former deputy minister of Commerce. He told this reporter that the modern logistics distribution system in cities for supermarkets, e-business and the “10,000-village, 1,000-township project” in rural areas are an important part of the modern distribution network.

The “10,000-village, 1,000-township project” was launched by the Ministry of Commerce in 2005. In a period of three years, it planned to build 250,000 rural shops in experimental areas, forming a rural retailing operation network led by shops in urban districts, with township shops as the backbone, and village shops as the basis, so as to gradually narrow the consumption gap between urban and rural areas.

Cheng Guoqiang, deputy president of the Institute of the Market Economy under the Development Research Center of the State Council, has made extensive investigation trips to the rural areas of Shaanxi, Hubei and Guangdong provinces. From his many years of experience at the grassroots he knows how serious the shortage of basic distribution facilities in the countryside is.

“In many localities basic parts of the infrastructure such as roads and water supplies for agricultural wholesale markets are obsolete. The IT and cold storage facilities are incomplete, and the service functions are too simple. Some wholesale markets lack service facilities such as information services, quality testing, transaction settlements, safety monitoring and garbage treatment,” said Cheng Guoqiang.

An Eye on Long-term

Arrangements

He Dengcai, secretary general of the China Society of Logistics and director of the research office of the China Federation of Logistics and Purchasing, said that the revitalization plan includes solutions to current problems, with an eye on long-term, overall and macro arrangements.

Medium and long-term arrangements were included in the revitalization plan, which was examined and adopted by the State Council on February 25. It stipulates, “Actively expand the demand of the logistics market, promote interactive development between logistics enterprises and production and commercial enterprises, and enhance the professionalization and specialization of logistics services. Accelerate the merger and reorganization of enterprises to nurture a number of large modern logistics enterprises with high service levels and international competitive capability.”

“Logistics enterprises must enlarge their operation scale, otherwise they will have problems in operation and services and face surviving risks. When the market environment is good, they can survive; once they meet difficulties and fierce transnational logistics competition, they can do nothing but surrender,” said Cheng Guoqiang.

In fact, following the sharp reduction of orders for foreign-funded logistics enterprises as a result of the spreading global financial crisis, overseas companies have accelerated their exploration of the Chinese market, targeting medium-sized and small enterprises, which they used to ignore. Last year US company FedEx began to launch services targeted at medium-sized and small enterprises, and its Kinkos China provides services such as document printing and express deliveries. UPS has also launched similar businesses. In 2009, the focus of competition between domestic enterprises and foreign-funded operations will move from first-line to second-line cities.

It is worth noting that basically all large private logistics enterprises have become merger targets for foreign-funded logistics enterprises, and some have in fact been merged or are in the process of merging. Cheng Guoqiang holds that the promulgation of the readjustment and revitalization plan of the logistics industry will create a relatively stable environment for domestic logistics enterprises. Meanwhile, it will effectively prevent large-scale acquisition of Chinese logistical assets by international capital.

Electronics and Information Industry Groping for New Growth Pattern

FENG Jun, president of Beijing Huaqi Information Digital Technology Co., Ltd., never misses any opportunity to promote his products. During the 2009 session of the Chinese Peoples Political Consultative Conference (CPPCC), Mr. Feng, a member, displayed to fellow CPPCC members a silver Aigo T60 digital camera, notable for its intelligent anti-shake function. According to figures from Gome, Chinas largest electronics and electrical home appliances retail chain, Aigo T60 was Beijings best selling digital camera in January 2009, breaking the monopoly of Japanese brands for the first time.

Innovation the Key to Survival

Aigo, Chinas only domestic digital camera brand, has traveled a long and rocky road to get where it is today. In previous years Japan held an unchallenged position in digital camera production. The leading players Canon, Fuji and Sony all have factories on the mainland, and operate on their own respective core technologies. Without independently developed technologies, domestic manufacturers had no way to cut costs, and consequently no way of reaching beyond the meager low-end market. By 2007 Aigo was the only domestic brand making digital cameras.

“I thought we could find a way to integrate the technical edge of Japanese brands with our efficient costs and local marketing channels. Through phased independent research and development, we can eventually stage a coup and displace our Japanese rivals.” Feng Jun said. It is this belief that has kept Aigo pushing on.

Aigos success is a stark contrast to most medium-sized and small electronics and IT enterprises in Chinas coastal areas that simply manufacture for foreign brands. As overseas orders drop with avalanche velocity due to the financial crisis, many are faltering or failing. Steep slides were reported in both the volume and profit of electronic and IT exports in 2008. Among the hardest hit are integrated circuit, flat-panel displays, televisions, and computers.

“The IT industry is different from other industries. It is present in all of them, helps them to increase efficiency, and thereby increases the efficiency of all society,” Doctor Deng Zhonghan (John Deng) remarked. Doctor Deng, chief executive of the China Starlight Chip Project and chairman and chief scientist of Vimicro Corporation, led his company in inventing the first viable Chinese chip, which now provides graphic input chips for more than 60 percent of the worlds computer market. Doctor Deng senses a surging demand for IT products in the states stimulus plan for 10 industries. And the pledged increase in government investments in medical care, education, social security and rural areas will further expand horizons for the application of information technologies.

“By finding solutions for pivotal technical issues in various periods, such as those related to aviation, communications and the Internet, the U.S. steadily grew stronger, and outpaced other nations in the world.” Doctor Deng believes that China should follow suit. “In the past Chinas IT industry followed the pattern of importing technology and joint-venture manufacturing for export. Today with the rise of enterprises such as Vimicro, who create their own brands via independent research and development, China is transforming from a manufacturer into an originator.” He hopes that the word “Made” in the ubiquitous Made in China tags will soon be identified as an abbreviation for “Manufactured and Designed.”

During the 2009 session of the NPC Doctor Deng, a deputy, raised proposals on protecting and encouraging innovation in the integrated circuit industry. “We are in a better position to lead the economic resurrection,” he declared at the meeting.

Calls for innovation are well received at the top levels of the nation. The State Council has listed greater efforts in technical innovation as a strategic method of fighting the ongoing financial crisis. Starting in 2009, the central budget will annually earmark RMB 15 billion for technical industrial renovations, which will reach enterprises in the form of low interest loans to help them grow more innovative.

Finding New Markets

In addition to state funds, the government-sponsored national campaign to boost electric home appliance purchases by rural residents, and the release of 3G licenses to telecom companies, are both incentives for the electronic and IT industry, which is grappling with a sweeping economic slowdown.

As a result of the gloomy economy in the U.S. and Europe, the major importers of Chinas electronic products, the industrys exports have remained on the downside since early 2008, ending with a 13 percent decrease in annual growth from the previous year. Foreign investments in the sector also dwindled, and the fall was up to 18 percent for the computer and telecommunication industries last year.

“In these circumstances we hope the campaign to promote electric home appliance sales in the countryside will bail out our industries,” said Industry and Information Technology Minister Li Yizhong. “The biggest winner in the campaign will be the electronics and IT sector.”

When buying designated electric appliances, farmers can receive a rebate of up to 13 percent of the retail price from the government. The campaign has so far been confined to color TVs, refrigerators, washing machines and mobile phones, which have found huge demand among the rural population. It is estimated the rebate will spur domestic electronic sales by more than RMB 100 billion a year.

TCL President Li Dongsheng acknowledged a 16 percent rise in sales in the countryside since the company participated in the campaign, while sales for its LCTV have risen by a staggering 300 percent.

As for the 3G mobile phone service, the three telecom operators with 3G licenses will invest RMB 170 billion in 2009 in facilities construction. The figure will reach RMB 400 billion in three years, plus RMB 2 trillion in social funds. By the end of this period the 3G network will cover all prefectural-level cities in the nation. “Investment of this dimension will have a huge impact on Chinas telecom equipment manufacturers,” stated Lei Zhenzhou, former chief engineer of China Academy of Telecommunications Research.

Moving up the Product Chain

“The global financial crisis will incur an overhaul of the worlds electronic industry. For Chinese producers change means opportunity, which, if used wisely, will place us on a better footing as well as giving us a greater market presence in the business worldwide,” said TCL President Li Dongsheng.

Hisense, another major electronics company in China, launched the new development strategy in 2008, “high-end industry and high-end products of the industry.” In contrast to the decline in overall exports in the last quarter of 2008, its products featuring intelligent communication and optical communication technologies showed strong gains. According to Hisense President Zhou Houjian, in 2008 trade in its intelligent traffic system, for which the company owns full intellectual property rights, reached more than RMB 300 million, a 60 percent hike over the previous year.

“The brunt of the financial crisis will be borne by exports to the U.S and Europe, which are mainly up-scale products. The blow to lower-priced items is less devastating,” said Li Dongsheng. With the emphasis on average consumers, TCL has remained largely afloat in the economic slowdown. “We will beef up our production of liquid crystal flat-panel televisions during the industrys restructuring process, which will sharpen our edge in global competition.”

Upgrading the flat-panel television sector is one of the six priority projects in Chinas support plan for the electronics and information industry. Manufacturers of latest-model screens and parts can enjoy privileges for new- and hi-tech companies. In some sense development of big flat panels will decide the fate of Chinas color TV sector. Leading domestic players in the business, including TCL and Hisense, are well aware of this.

The effects of renovation and growth in the electronics and information industry can ripple out to other sectors of the Chinese economy, since the industry provides the necessary technologies and instruments for renovating others. “We have good ties with many industrial companies including major iron and steel groups as well as large state-owned enterprises who will have a big role to play in expanding domestic demand. They all show a desire for information technologies, and some cooperation projects between us are underway,” said Xiong Qunli, president of China Electronics Corporation (CEC), the largest state-owned IT company in China.