BUSINESS OUTLOOK SURVEY
Asia’s CFOs respond to economic turbulence.
By Tom Leander

Asia’s finance chiefs have yet to feel a cold shiver from fears of a U.S. recession. But they’re getting wary. And in China, CFOs are starting to worry about that market’s breakneck pace.

CFO optimism in Asia—indicated by the percentage of CFOs who are more optimistic about the economy than last quarter—has dipped slightly to 59 percent in September, from 65 percent in June and 71 percent in March. In China, only 41 percent are optimistic.

These results, from the Duke University/CFO Business Outlook Survey, paint a broad picture of CFO sentiment and spending plans around the world. The survey closed on September 7, at a time when the world’s CFOs were digesting the turn in the global credit cycle. Some 175 CFOs responded from Asia (outside China), 181 from Europe, and 580 from the United States. In a first this quarter, the survey added an exclusively Chinese component. Some 380 Chinese CFOs were polled in Chinese and asked specific questions about China’s economic climate.

For a tinge of uncertainty, look to China, where CFOs are expressing qualms both about China’s economy and the world’s. Some 85 percent of respondents say that while China’s growth is sustainable, fears of overheating are realistic. China’s inflation rate spiked to 6.5 percent in July, driving the government into even more aggressive interest rate increases. China has already raised its interest rates three times this year, and analysts expect at least one more rate rise by year-end.

Moreover, China’s CFOs cite regulatory fatigue as a top concern. New labor, antitrust, and securities laws have added complexity to companies’ operational management. Frank Lin, CFO of Asimco, an auto parts manufacturer that exports to Europe and the United States, says that China’s CFOs have their eye on October’s Communist Party Congress, held every five years. The government is expected to emphasize social welfare amid blistering growth. Lin says the concern is not that business will be hobbled by new laws, but that the government will pass yet more laws without simultaneously offering guidelines for companies to follow. “The regulatory changes are coming fast—very fast,” Lin says.

Lin also says that manufacturers are grappling with China’s shift to International Financial Reporting Standards (IFRS), aligning China’s accounting with International Accounting Standards. Some 68 percent of the CFO respondents say that they will take a one-time hit to earnings as they switch to IFRS accounting. Lin says this is a matter of asset valuation. The switch to IFRS allows CFOs to mark assets to market. Doing so requires establishing a fair value for the assets. This can be difficult in China, since some markets are not developed enough for accurate price discovery. Property prices, for one, fluctuate wildly, often because prices are set by local officials, making nonsense of the idea that there is a market to mark to. In the face of these difficulties, Lin says, manufacturers tend to value conservatively, taking heavier provisions against assets than might be necessary, which will in turn drive earnings down.

China’s CFOs may have many problems on their minds, but the product-quality disputes between the United States and China isn’t one of them. Most of China’s manufacturing CFOs (58 percent) said that the discovery of tainted exports from China—from toothpaste to Thomas the Tank Engine—won’t hurt their businesses. U.S. CFOs shrugged off the issue, too. Most said that they were not considering shifting their supply chains from China in response.

Elsewhere in Asia, 38 percent of the CFOs said that their companies will increase their level of M&A activity within the next 12 months. Analysts have argued that underleveraged, cash-rich Asian companies may well benefit from a buying opportunity now that debt-ridden private equity firms have been forced to the sidelines in the world credit bust.

Predictably, CFOs in the United States were glum across the board, reflecting the fallout from that country’s housing market collapse. Only 14 percent of the U.S. CFOs were more optimistic about the economy—the lowest number ever recorded by the survey. One third said that their firms have been affected by recent credit market turmoil. Of these, 58 percent said their borrowing costs had increased by 72 basis points on average.