Nothing To Fear But Fear Itself… and Deflationary Spirals
When I talk to people in New York about the economy, I know exactly how they feel. I’ve lived through recessions and long bouts of high unemployment. I know how it feels, how it looks, how it smells. I don’t know exactly how Shanghai feels right now – but the mood doesn’t seem all that gloomy. Shanghai wants to just keep plugging along like nothing is wrong. China has confounded doomsayers before, and we may be seeing it again.
How bad can the recession in Shanghai be? A little bit of slow business, a little bit of price-cutting… Soon enough we’ll have our new boom or recovery or value chain climb. Speculative bubbles, inflation, stock market crash, drop in global demand – we’ve been there, seen that, and were not impressed. No one is going around like this is the end of the world. People are still pretty relaxed and upbeat.
Maybe Shanghai is just that tough. Like New York, but on Prozac.
Inflation: GOOD, Deflation: BAD
Yeah, Shanghai could probably slow-dance through this whole global downturn without even noticing it much – if it stays like this. As long as the big global companies keep their Shanghai offices 75% staffed - the general level of activity on the Bund and in XinTianDi should be lively and fun. A few places will close and fewer will open, but it’ll still be hard to find a cab on Friday nights.
No, a standard NY-style recession isn’t going to throw the China train off the rails – it probably won’t even slow it down much. The only real danger is a deflationary spiral of price-cuts leading to bankruptcy leading to unemployment leading to lower demand leading to more price cuts… etc. Then people clear out. The problem with deflationary spirals is: A) they’re not really all that common in fact (though economists love talking about them because they’re about the sexiest thing in the dismal science of economics) B) you almost never see them coming because they look like something else. They look like business is lousy – which is nothing all that new to retailers and sales managers.
Deflationary cycles come from desperation and fear. You are a business owner who buys from a supplier and sells to a customer. When customers buy less, your inventory piles up – then you cut orders to your supplier. Now there are 3 people who don’t want to buy anything new – you, client and supplier. So what happens? You start lowering your prices to get your inventory out the door while it still has some value to someone. This not only devalues the rest of your inventory – but also your client’s and supplier’s inventory. The value of your entire supply chain sinks – all the way back to the processor of raw materials.
China is particularly vulnerable to deflationary cycles, because so much of its economy is tied to manufacturing – which is particularly vulnerable to deflation. Think of 3 guys – one sells coal, one sells computers and one sells vegetables. The vegetable guy has a couple of days before his inventory loses most of its value. The computer guy is next – he has a couple of weeks or months, but once a new model comes out his inventory loses value as well. The only one that can possibly benefit is the guy with coal – or other natural resources. Coal and oil can stay in the ground and wait for better days. China’s economy is heavily weighted towards deflation-prone manufacturing. That’s why people keep talking about how damaging deflation could be in China.
The last place you want to be is on the tail end of a deflationary spiral. They’re bad enough if you know what’s going on – but if one sneaks up on you then you’re dead. If you do have idle workers sitting around with time on their hands, have them do a detailed competitive analysis of people targeting your demographic. Are they cutting price gradually, or aggressively? Are they cutting back on product lines, or introducing new services? Make sure you understand what’s really happening in your sector of the market. If the ground is melting under you feet, you’ll have to step quickly or get sucked down.
When I talk to people in New York, I know exactly how they feel. I’ve lived through recessions and long bouts of high unemployment. I know how it feels, how it looks, how it smells. I don’t know exactly how Shanghai feels right now – but the mood doesn’t seem all that gloomy. Shanghai wants to just keep plugging along like nothing is wrong. China has confounded doomsayers before, and we may be seeing it again.
How bad can the recession in Shanghai be? A little bit of slow business, a little bit of price-cutting… Soon enough we’ll have our new boom or recovery or value chain climb. Speculative bubbles, inflation, stock market crash, drop in global demand – we’ve been there, seen that, and were not impressed. No one is going around like this is the end of the world. People are still pretty relaxed and upbeat.
Maybe Shanghai is just that tough. Like New York, but on Prozac.
Inflation: GOOD, Deflation: BAD
Yeah, Shanghai could probably slow-dance through this whole global downturn without even noticing it much – if it stays like this. As long as the big global companies keep their Shanghai offices 75% staffed - the general level of activity on the Bund and in XinTianDi should be lively and fun. A few places will close and fewer will open, but it’ll still be hard to find a cab on Friday nights.
No, a standard NY-style recession isn’t going to throw the China train off the rails – it probably won’t even slow it down much. The only real danger is a deflationary spiral of price-cuts leading to bankruptcy leading to unemployment leading to lower demand leading to more price cuts… etc. Then people clear out. The problem with deflationary spirals is: A) they’re not really all that common in fact (though economists love talking about them because they’re about the sexiest thing in the dismal science of economics) B) you almost never see them coming because they look like something else. They look like business is lousy – which is nothing all that new to retailers and sales managers.
Deflationary cycles come from desperation and fear. You are a business owner who buys from a supplier and sells to a customer. When customers buy less, your inventory piles up – then you cut orders to your supplier. Now there are 3 people who don’t want to buy anything new – you, client and supplier. So what happens? You start lowering your prices to get your inventory out the door while it still has some value to someone. This not only devalues the rest of your inventory – but also your client’s and supplier’s inventory. The value of your entire supply chain sinks – all the way back to the processor of raw materials.
China is particularly vulnerable to deflationary cycles, because so much of its economy is tied to manufacturing – which is particularly vulnerable to deflation. Think of 3 guys – one sells coal, one sells computers and one sells vegetables. The vegetable guy has a couple of days before his inventory loses most of its value. The computer guy is next – he has a couple of weeks or months, but once a new model comes out his inventory loses value as well. The only one that can possibly benefit is the guy with coal – or other natural resources. Coal and oil can stay in the ground and wait for better days. China’s economy is heavily weighted towards deflation-prone manufacturing. That’s why people keep talking about how damaging deflation could be in China.
The last place you want to be is on the tail end of a deflationary spiral. They’re bad enough if you know what’s going on – but if one sneaks up on you then you’re dead. If you do have idle workers sitting around with time on their hands, have them do a detailed competitive analysis of people targeting your demographic. Are they cutting price gradually, or aggressively? Are they cutting back on product lines, or introducing new services? Make sure you understand what’s really happening in your sector of the market.