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Falling stocks put Chinese companies on the defensive

Chinese department stores have seen fewer customers during the bear market.

BEIJING -- The bear market storming over mainland China is raining on the growth strategies of major Chinese corporations.

     Internet retailing giant Alibaba was riding high on booming consumer spending but now faces a bust. Personal computer maker Lenovo Group wielded bullish stock prices as a weapon in making acquisitions globally but now a yellow caution light flares in its path for growth. Many other companies also had benefited from capital procurement backed by stocks, but the business environment suddenly has soured. Foreign actors taken in by China's massive buying power may rethink their operations in that country.

Customers vanish

Signs touting high-end brands like Louis Vuitton and Prada grace The Mixc, a huge mall in the Chinese city of Shenyang in Liaoning Province. The number of customers coming through the doors of stores once packed with young couples has fallen more than 10% since stock markets started plunging in mid-June. The Mixc is run by state-owned company China Resources, which also has two other large stores in the city, but "except for restaurant districts, customers have mostly disappeared," a source said.

     Calibrating consumption with an eye on the value of their real estate and stock portfolios has become common among the Chinese. Bullish markets made for looser purse strings and drove spending on high-end items. But the stock crash has created paper losses for a growing number of investors, leading to a negative wealth effect and cutbacks on spending.

     The Chinese middle class took the brunt of the damage, as these people put a lot of their wages and savings into stocks. Even The Mixc is seeing fewer customers making 7,000 yuan to 20,000 yuan ($1,100 to $3,200) a month. China Resources runs complexes that house condominiums with department stores in 51 cities, all catering to the middle class. A continuing Chinese bear market could alter the company's strategy for large-scale stores.

Pain for all, big and small

     Tanking stocks are hindering major Chinese companies trying their luck overseas, such as Alibaba. Since the June slide in the Chinese market, Alibaba's shares on the New York Stock Exchange also have plummeted, falling to a year-to-date low Tuesday. Its stock is 40% below its record on the NYSE attained in November.

     Alibaba has been making bold moves in Southeast Asia, but 80% of sales still come from its virtual marketplace in China. Now it has to contend with customers who were unlucky investors. "I lost 20,000 yuan in the stock market, so I'm not spending as much at Taobao," a Beijing man in his 30s said.

     The team at Lenovo's Beijing home office charged with acquisitions received this official notice from company leaders: "Review the stock prices of companies under consideration for investment and carefully scrutinize your plans of action once again."

     Last year Lenovo bought Motorola Mobility's cellphone manufacturing business and IBM's low-cost server operation in rapid succession. The $5 billion needed to close those deals was covered by Lenovo stocks. During the high times, the company used its shares as an ATM to buy businesses without adding debt. With Lenovo stocks now taking a beating, one source close to the company bemoans that "it now has to tread carefully in using stocks to purchase businesses."

     However, large corporations like Alibaba and Lenovo are able to weather the bear market, which cannot be said for emerging businesses. One information technology firm had seen its share price soar in Shenzhen's ChiNext index on hopes that it will supply Google smartwatches with advanced components. But the company fell in the red in the fiscal year ended December. The company's executive, needing money to finance the development of those components, borrowed using his own stocks as collateral. Now that stocks have tanked, the executive is being harried daily to put up more collateral or pay up.

     Even overseas companies feel the pinch. "Sales have fallen 40% this past month," the head of a Volkswagen dealership in Beijing said. "I can't sell cars because of the falling stock market."

     An executive of Volkswagen's Chinese division said that the pace of production expansion may need to be slowed down. The company might rethink plans to spend 22 billion euros ($24.2 billion) in capital investment over five years to increase output.

Nikkei staff writer Daisuke Harashima in Dalian contributed to this article.

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