Last year, China surpassed Korea to become Asia's second-biggest ad market, after Japan. Advertisers spent more than $5 billion there, according to the AC Nielsen market research firm. Ten years ago, the world's most populous country wasn't even in the top 30 markets for advertising world-wide.But now, after "years of unbelievable growth, we're seeing a kind of slow-down we haven't seen before," says P. Miles Young, chairman of the Asian-Pacific region of US ad-agency Ogilvy & Mather, one of the world's 10 largest.

Already, many US and European advertising have borne losses for years, rather than risk being excluded from a potentially huge market. Now things are looking grimmer: Chinese consumers are staying out of stores even though Beijing has done things like cut taxes seven times in the past three years.

And China says gross-domestic-product growth will slow this year, to 7 per cent from almost 8 per cent last year. While 7 per cent would look pretty good anywhere, particularly in recession-ravaged Asia, Chinese government statistics are generally considered optimistic.

If you simply add up all the advertisements on Chinese TV and newspapers, and multiply them by the published ad rates, it appears that ad spending is actually growing 10 per cent this year, according to AC Nielsen. But that is deceptive: television stations and newspapers are probably heavily discounting their published rates this year. "In tough times, sellers get more flexible," says Steve Garton, director of business development in northern Asia for AC Nielsen.

The economic outlook is spurring foreign manufacturers, whose sales have declined all over Asia after the economic crisis two years ago, to take a harder look at spending on advertising in China. "Two years ago, China was the gravy train every agency wanted to jump on," says young of Ogilvy. But today "you're buying a licence to lose money going into China," jokes Etienne Boisrond, chairman of the Asian unit of US ad-agency Young & Rubicam.Young & Rubicam opened in China in 1986 and represents Sony of Japan and toothpaste-maker Colgate-Palmolive of the US. It has yet to make a profit in China, Boisrond says. He says he suspects few agencies are either.

Ogilvy & Mather opened shop in China in 1995 and represents International Business Machines, Anglo-Dutch soap maker Unilever, Kentucky Fried Chicken and a smaller group of Chinese clients. Young says the company is profitable in China.

But the high costs of operating in China keep some foreign ad agencies in the red. There are too few trained executives to staff the dozens of agencies operating in China, so expatriates with expensive pay and housing packages must be shipped in from Hong Kong and further afield. Consumer research is difficult and expensive. And running multiple offices-many agencies have them in Beijing, Shanghai and Guangzhou-gets expensive, too.Those kind of costs keep profits at Leo Burnett's China operation "modest," says Dennis Wong, managing director. Profit margins are well below most of the rest of the Chicago-based company's Asian operations. Burnett represents some of the biggest consumer-product companies in the world: McDonald's; Philip Morris, maker of Marlboro cigarettes; and Coca-Cola.

But in China, the holy grail for ad agencies remains the Chinese advertisers. This year, Chinese companies will spend eight times what foreigners spend on advertising, says Ogilvy & Mather, up from outspending foreign advertisers by only three-and-a-half times the year before. The most spending is in businesses that Chinese companies dominate - tonics, vitamins, retailing, housing, and over-the-counter medicine.

China's biggest ad buyer is Gai Zhong Gai, a health drink, which doubled its spending this year according to AC Nielsen. The fourth-biggest spender, Fenhuang Cola, increased its advertising 71 per cent as this company and other Chinese brands fight back against imports like Coca-Cola.

In fact, Coke ranks only 12th in nationwide spending, behind products such as Wahaha AD Calcium Milk, and Xieliting Medicine, a diarrhoea treatment. At No.12 on the list, Coke is the first prominent Western product.

Does it make sense for multinational agencies to struggle just to maintain a foothold in China? Of China's 1.2 billion people, a billion or so are living in the countryside and still mired in poverty. China ranks 45th in the world in economic output per person, behind South Africa and just one place ahead of poverty-stricken India, according to the World Competitiveness Yearbook published by the Swiss institute IMD. It will take years for a sizable middle class to develop.

"But you have to be here," says Boisrond of Young & Rubicam. "This is too much of an opportunity to look at it from a straight profitperspective."

(The Asian Wall Street Journal)