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China Slowdown's Ripple Effect on Foreign IT Vendors

TAIPEI ( TheStreet) -- Tales about the slowdown in China's economy have maundered on for two years and we all must have priced it into our positions by now, I thought lazily this week. That jaded view was suddenly shattered by a new report.

The slowdown from breakneck growth of 9% to 10% over the decade from 2001 is squeezing real businesses, according to evidence from tech industry market research firm IDC. The American market research company forecasts IT spending growth of 9.5% in China this year, down from a previous prediction of 12.9% growth and a "sharp" deceleration compared to the past four years. Watch out if you sell PCs, servers or IT services to China.

China's GDP is supposed to grow 7.8% this year, the International Monetary Fund says. Also, just for statistical fun: IDC says worldwide IT spending will rise 4.6% this year, less than a previous forecast of 4.9% and last year's 6%.

Managers of large firms in China can cut IT spending, from the boss's new BlackBerry to replacement of an entire office-wide system, as that cost-cutting technique is "easily scalable," says Jay Jacobs, research analyst with Global X Management in New York.

"A slowdown in China is certainly putting negative pressure on revenue in the region, and in order to keep profitability I am not surprised to see a reduction in IT spending," Jacobs says, anticipating a shift from initial investment in new technology to replacement of existing systems. "This makes it easier for companies to cut back on expenditures and simply extend the life of their existing IT infrastructure."

About 10% of global IT spending takes place in China, where some 600 million people use personal computers and 1.2 billion (most of the population) have mobile phone accounts. Specifically, IDC says, China makes up 16% of world PC spending and 23% of smartphone spending.

Stephen Minton, vice president with the IDC Global Technology and Industry Research Organization, calls China's cutback on IT outlays part of a "classic spending reduction cycle" in response to the broader slowdown.

That means making PCs and servers last longer and extending upgrade periods, Minton says. He says this trend already showed in the first half of the year.

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