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If China’s economy is weakening, someone forgot to tell
“My parents haven’t asked me to cut back my spending,”
says Wang, a 22-year-old graduate student in Beijing who collects
limited-edition fragrances from brands like Chanel and Guerlain that can cost
up to $300 (about R4 000) each. She said her parents are paying her monthly
bills of about 6 000 to 8 000 yuan (about R12 000 – R16 000) and will keep
supporting her if she struggles to find a job.
Wang is just one member of China’s Generation Z trying to
find her way in a country of 1.4 billion, but her story gets to the conundrum
facing investors trying to assess the world’s second-largest economy.
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While Apple, Caterpillar, Volkswagen and other companies are
sending tremors through Wall Street with warnings about softness in China,
others are sounding more bullish, including fashion brands that might appeal to
affluent consumers like Wang.
“We are not seeing a slowdown,” said Patrice
Louvet, chief executive officer of Ralph Lauren, where revenue in China grew 19%
last quarter. “We continue to be excited about the opportunity for us.
We’re highly underdeveloped in China.”
The two camps have come into stark relief in recent weeks.
China’s rapid economic growth of years past is slowing, and the trade war with
the US has unsettled businesses.
Dozens of multinationals have sounded the alarm about
weakening demand and, in cases like Caterpillar, reported unexpected declines
in sales in the fourth quarter. Hundreds of Chinese companies also have issued
But others are upbeat about business in the Asian nation.
Toyota Motor is doubling down on the market, and rolling out an all-new version
of the world’s top-selling vehicle, the Corolla.
Paris-based luxury giant LVMH and UK distiller Diageo have
posted strong sales in the country.
READ: China slowdown deepens as trade truce fails to revive
Sales growth of the Jimmy Choo label in Greater China was
the strongest of all regions last quarter, their owner, Capri Holdings, said
Wednesday. Michael Kors, another Capri brand, did well in Mainland China,
although Asia sales overall were hit by a drop in Chinese tourists to Japan,
Korea and Hong Kong.
Earnings reports later this week from L’Oréal SA and Pernod
Ricard SA may provide further insight.
“If you’re a young Beijing person, and your parents
have raised you as an only child, you might not feel the effects,” said Sara
Hsu, an associate professor of economics at the State University of New York at
New Paltz who specialises in the Chinese economy. “But that certainly
doesn’t cover a lot of people.”
China has always been a difficult economy to read. The
government produces less data than other major nations and uses public
assistance that can make it hard to assess the real health of demand. That’s
left China watchers like Leland Miller, CEO of China Beige Book, pointing to
corporate warnings as a more telling data point.
Government data is “not reflective of what’s happening
across the Chinese economy,” Miller said. “You have much more
substantial weakness right now, and it’s a problem because it’s not being
understood by investors.”
READ: US, China talking some more but deal prospects still
One of Miller’s top concerns is that Chinese companies have
been borrowing heavily over the past three quarters, and that hasn’t
jump-started investment or growth. Just last week, more than 400 publicly
traded Chinese companies told investors that 2018 results had deteriorated.
And a corporate tax cut, which has been floated, wouldn’t be
all that helpful because so many firms are state-owned enterprises that already
have low tax bills. Toss in a continued trade war, and the situation could
“What would really set things off is if these trade
talks break down, and you have this layered on top of the current weakness,”
Miller said. “You will absolutely see a crisis in China.”
Signs of stress
Jay Foreman, CEO of closely held toymaker Basic Fun in Boca
Raton, Florida, just spent a month in China meeting with factories and saw
subtle signs of stress.
Manufacturers, he said, seemed more desperate to gain or
keep his business, including offering better credit terms and smaller down
payments to start a production cycle. One reason is that the trade war has
pushed companies to speed up plans to find alternative places to source goods,
such as Vietnam, Indonesia and India.
“We’re finding ways to, if not get discounts, get more
advantageous pricing,” Foreman said. “There is a lot of factory
READ: Asia markets up after strong Wall St lead
And that’s during a period when many companies were rushing
to import goods from China ahead of a planned increase in US tariffs slated for
President Donald Trump then delayed that hike until March 2
to allow for more negotiations, adding another incentive to beat that deadline.
That’s one explanation for the US trade deficit with China widening since the tariffs
were put in place last year.
The slowdown has hit a wide variety of products: cars,
automotive parts, Tupperware Brands containers, computer chips from Intel and
Nvidia, softwood and fluff pulp from International Paper, Hitachi’s
construction machinery and chemicals from DowDuPont. The list goes on – many
are run-of-the-mill goods, the first links in the supply chain.
“The trade dispute has had a negative impact on the
global economy, and the German automotive industry in particular,” Daimler CEO
Dieter Zetsche said Wednesday, noting the impact on Mercedes SUVs imported to
China from its factory in Alabama.
READ: Slump in German manufacturing orders set to fan
Across 195 fourth-quarter earnings calls of S&P 500
firms analyzed by Bloomberg Intelligence, 100 companies cited a slowdown in
China, according to a February 4 report.
“The irrational exuberance they used to have, that
China was a slam dunk and such an untapped opportunity, has now been pretty tempered,”
said Steve Pasierb, president of the Toy Association, a trade group for
“Yes, the population growth is still happening there
and growth in the middle class, but things have slowed.”
China’s economy expanded at a 6.6% rate last year,
the slowest since 1990 but a pace other major economies can only dream of. The
government’s response with targeted stimulus measures has propped up some
sectors, and while it’s being tested by the standoff with Trump, many executives
are expecting more this year.
Eaton, a Cleveland-based conglomerate, said its China unit
continued to perform well last quarter, citing in particular a more than 20%
jump in sales of excavators. While growth will moderate, “the Chinese
government will stimulate at some point during the course of the year, so we do
think that the second half of the year is stronger than the first half,” CEO
Craig Arnold said on a January 31 conference call.
Many of the companies that have bucked the gloomy trend are
consumer businesses. Alibaba Group Holding beat earnings estimates, Unilever
said China is resilient, while French kitchen-appliances maker SEB SA, a French
maker of pressure cookers and saucepans, said it’s still bullish about its
two-digit growth forecast for China this year.
Cees Hart, the CEO of Danish brewer Carlsberg A/S, said
Wednesday he’d recently visited the company’s team in China and that the start
of the year had been promising.
Rich Chinese splurged on LVMH’s Louis Vuitton handbags and
Hennessy Cognac. There’s even evidence rural shoppers are buying more expensive
But if history is any guide, the wealthy are often the last
to feel an economic downturn. Alex Du, a 30-something retail worker in Beijing,
says he doesn’t have much savings, and couldn’t afford a car.
“Pretty much spend every penny I make,” Du said.