China, as the world's second-largest economy, plays a pivotal role in the global economic landscape. Its economic performance has ripple effects across various sectors and regions in Asia and beyond.
In recent year, China's economic trajectory has seen some fluctuations, which public companies with significant ties to China must consider when developing their 2024 top and bottom line guidance as well as the strategic intent for current and future capital allocation.
In August 2023, China released a broad range data including August 2023 that informs 2023 guidance updates, 2024 Operational Planning and 2024 guidance:
- Economic Pressure: A series of data has indicated increasing economic pressure from various sectors, leading Beijing to reduce key policy rates to boost activity. However, experts believe that more measures are required to rejuvenate growth which could weigh on 2024 economic growth rates.
- Interest Rate Cuts: In response to the winding down of the post-COVID economic rebound that has impacted global financial markets, China's central bank has made unexpected cuts to key interest rates.
- Economic Indicators: Data from the National Bureau of Statistics (NBS) showed that retail sales, industrial output, and investment have all grown at a slower pace than anticipated, suggesting that the primary engines of business and consumption in China are underperforming and that there is a impact on the Chinese economy and countries with substantial ties, including those that benefit from the Belt and Road Initiative.
- Youth Unemployment: China has halted the publication of youth unemployment data, which had reached a record 21.3% in June.
- Economic Outlook: Analysts from Nomura have expressed concerns about China's economic future, suggesting that the nation is on the brink of an economic downturn.
Given the current economic scenario in China, public companies should consider the following questions to develop their 2024 top and bottom line guidance as an output of the 2024 Operating Planning Process.
- How exposed is our company to the Chinese market, and what percentage of our revenue comes from this region? How much variability do we assign to this component of our revenues?
- Are there alternative markets we can focus on to diversify our risk? What impact will that have economically in the short and long term and capital allocation policy?
- How might the slowdown in China's economy impact global supply chains, and how can we mitigate these risks? How will these impact our margins in 2024 and beyond?
- What strategies can we implement to navigate potential currency fluctuations between the yuan and other major currencies? How should we model that for 2024 and is there projected seasonality?
- How will the economic situation in China affect consumer demand for our products or services in the region? What is the downside scenario and mid scenario
- Are there opportunities to capitalize on China's economic adjustments, such as potential mergers or acquisitions? How would we think about signaling this as part of 2024?
- How might China's economic policies, such as interest rate cuts, impact our business operations or investment strategies? How broadly do we want these ranges to be given potential downside scenarios?
- What contingency plans do we have in place if China's economic situation worsens? What is our downside scenario? Do we want our guidance range to be broader earlier in the year or different quarterly pattern?
- How can we support our employees and operations in China during this period of economic uncertainty? How should we think about communicating this folks, even though non-financial?
- Given the interconnectedness of global economies, how might economic challenges in other countries dependent on China impact our business? How much context do investors have for the interrelationship of our business in China with those countries with significant dependence on China economic growth?
China's economic performance is crucial for many global companies. Given the recent economic results, it's imperative for companies to be proactive, transparent, and strategic when communicating their 2024 guidance to investors, especially in their upcoming Q3 or Q4 earnings calls.?