Prospects Looking Brighter for CKGSB Alumni Companies

March 30, 2015

With the CKGSB Business Conditions Index (BCI) posting its highest reading for nearly a year, things are looking up for competitive companies in China, despite the potential impact that continuing macroeconomic risks might have on operations.

The CKGSB Business Conditions Index (BCI) registered a reading of 56.9 in March, up on February’s index of 53.2, and above the confidence threshold of 50. It is the highest reading since April 2014 and shows that the majority of relatively successful firms sampled—enterprises whose executives have studied, or are studying, at CKGSB—have a positive outlook on business prospects in the next six months. Looking at the overall trend, however, the BCI has shown continued low sentiment since the second half of 2014.

        Figure 1 CKGSB BCI

Source: CKGSB Case Center and Center for Economic Research

In the monthly questionnaire that forms the basis of the index, respondents from around 100 companies are asked to indicate whether their firm is more, the same, or less competitive that the industry average (50), and from this a sample competitiveness index is derived (Figure 2). Since the firms, controlled by former or current CKGSB students, are in a relatively strong competitive position in their respective industries, the CKGSB BCI indices are typically higher than government and industry PMI indices. Users of the CKGSB BCI index may therefore focus on data changes over time to forecast trends in the Chinese economy.

        Figure 2 Industry Competitiveness

Source: CKGSB Case Center and Center for Economic Research

The CKGSB BCI comprises four sub-indices that are forwarding-looking indicators for corporate sales, corporate profits, the corporate financing environment and inventory levels. The corporate sales index (Figure 3) registered 76.1 in March and the profit index (Figure 4) registered 57.1, both higher than the confidence threshold of 50. Both indices have risen since last month, with the sales index rising a full 7 points to reach the highest figure since December 2013.

 Figure 3 Sales Figure 4 Profit
Figure 5 Financing Figure 6 Inventory

Source: CKGSB Case Center and Center for Economic Research

The corporate financing environment index (Figure 5) increased from 40 in February to 44.5 in March. With the confidence level still below 50, this indicates that conditions for financing are not great, especially compared with last year. Since the majority of the sample consists of private firms, this data show that firms in the private sector face challenging financing pressures. Meanwhile, the index measuring inventory levels (Figure 6) registered 45.1 in March, which is higher than last month’s index but still under the confidence threshold of 50. Inventory pressures are expected to remain serious in the upcoming period.

Besides the main indices, respondents were also surveyed on forecasted costs, prices, investment plans and employment conditions to form a supplementary set of indices. To view these indices in full, please click here.

Overall, the March CKGSB BCI shows a positive outlook for business in China. However, given the low indices recorded in the second half of 2014, it is clear that macroeconomic risks remain. For private companies and SMEs, financing, inventory and costs remain the major challenges. However, the central bank’s relaxation of interest rates can help to relieve financing pressures and deflationary risks, which, in turn, will have a positive impact on the real economy.

About the CKGSB BCI

In 2011, the CKGSB Case Center and Center for Economic Research initiated a project under the direction of Professor Li Wei to gauge the business sentiment of executives about the macro-economic environment in China. This became known as the CKGSB Business Conditions Index (BCI).

The CKGSB BCI is a set of forward-looking, diffusion indices. The index takes 50 as its threshold, so an index value above 50 means that the variable that the index measures is expected to increase, while an index value below 50 means that the variable is expected to fall. The CKGSB BCI thus uses the same methodology as the PMI index.

For example, the survey asks senior executives of companies whether their main products are for consumers or non-consumers, and then asks how they think product prices will change in the next six months. Based on survey responses, the CKGSB BCI reports expectant changes in consumer and producer prices. Companies are also asked for information pertaining to their relative competitive positions in their respective industries, which forms the basis of a competitiveness index. The higher the competitiveness index, the more competitive the sample firms are in their respective industries.

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