THE DRAGON STUMBLES
AFTER DECADES OF EXPLOSIVE GROWTH, CHINA’S ECONOMY IS FALTERING – AND COULD DRAG THE WORLD DOWN WITH IT
For most of the past two decades, China — with 400 million middle-class consumers growing richer by the day — was a one-way bet for the world’s corporations and a driver of the global economy.
By early 2018, General Motors was selling a third more cars in China than in the U.S. Starbucks unveiled plans to open a new coffee shop in China every 15 hours on average. Adidas saw 26 per cent growth in China while Western Europe, its home market, was staying flat or shrinking.
But what happens when the Chinese growth juggernaut slows? Or worse yet, grinds to a halt?
The world got a glimpse on Wednesday when Apple, the second-largest public tech company, lowered quarterly sales estimates for the first time in more than 15 years. Chief executive Tim Cook blamed the unforeseen “magnitude of the economic deterioration” in China, the world’s largest smartphone market. Apple shares plummeted nearly eight per cent in after-hours trading and pulled down a bevy of consumer stocks with exposure to the Chinese market.
And in China, the economy appears to be overshadowing a major space achievement — China landing on the so-called dark side of the moon.
On China’s most-watched TV news program, it wasn’t among the four top stories, perhaps reflecting political and economic anxieties, the New York Times reported.
“The economy is bad,” the paper reported a café patron, Liu Ying, as saying. “Is it really a good thing for the country to spend recklessly?”
Meanwhile, China’s plan to cut taxes in 2019 for the masses has the nation’s super-rich running for cover on concern the government will make up the shortfall by going after the wealthy.
Changes to the tax regime as of Jan. 1 mean authorities will be paying closer attention to assets and investment holdings. In a nation where personal wealth is estimated to have climbed to a record US$24 trillion in 2018 — US$1 trillion of which is held abroad — that potentially offers rich pickings.
Tougher taxes at home could have implications beyond China’s shores, with the country’s wealthy having been on a buying binge in recent years, driving up prices for everything from property in Vancouver and Sydney, to famous artworks and fine wines.
While a number of factors may have played into Apple’s travails, including political tensions and a trade war with the United States, the news from Cupertino seems to affirm a warning that Chinese economic observers have been sounding for years, particularly in the last few months: the slowdown in China’s economy might be worse than many appreciate — and so, too, are the spillover effects.
“China’s economy is definitely slowing quite a bit across a bunch of sectors, and this slowing momentum is likely to continue for another couple of months at least,” said Arthur Kroeber, the founder of Gavekal Dragonomics, a research firm in Beijing. “And consumer confidence is definitely down, which is probably part of what’s behind the Apple numbers.”
After multinational companies relied heavily on China for years for growth, warning signs across different industries are beginning to crop up suggesting there are broad, ominous trends gathering force in the world’s second-largest economy. In that regard, Apple isn’t alone.
Months after Starbucks announced a massive China expansion this year, it said that sales there would increase just one per cent, far below those in the United States. Jaguar Land Rover briefly shut a factory in Britain after September sales in China dropped by a half. LVMH, the luxury giant that owns Louis Vuitton and has been used as a barometer for consumer spending in China, said the Chinese were spending “a little bit less.”
The significance of Apple’s results is partly that it sheds a bit of light on what’s really going on in China — and how that might affect other firms and economies — in a country where top-line economic data given by the government are murky at best and fudged at worst.
Although Chinese officials report that GDP has been growing at more than six per cent a year for a few years, “it looks truly like some sixth grader got out their ruler and drew a straight line with a slight downward slant,” said Christopher Balding, an expert on China’s economy at Fulbright University in Vietnam. “It’s totally unrealistic.”
As worries have mounted in recent months, top financial regulators have held meetings with economists at banks and brokerages to instruct them to take into account the interests of the Communist Party when they publish economic analyses — an apparent euphemism for holding back alarming language, Bloomberg reported in November.
But over the past 12 months, bits and pieces of data coming out have been precisely that: alarming.
Car sales have been shrinking for the first time since 1990. A key manufacturing survey at the end of the year showed Chinese factory activity actually contracting. And revenue from consumption tax was down 72 per cent in November from a year ago, Balding said.
Chinese investors have been among the most pessimistic about their economy’s prospects: China’s stock market lost US$2.3 trillion, or about a quarter of its value, in 2018 — its worst performance in a decade.
To be sure, Apple is buffeted by forces far beyond the country’s macroeconomic trends. Tech analysts say local brands like Huawei and Oppo have been closing the gap with Apple in terms of performance and design even while Cupertino continues to raise its prices.
Meanwhile, the U.S. arrest warrant for Huawei CFO Meng Wanzhou, who has been detained in Canada, touched a nerve in a country where nationalism — and distaste for the United States — has been on the rise.
In recent weeks, Chinese media have reported stories of companies rewarding employees who ditch their iphones to buy Huawei, said Shen Dingli, a commentator in Shanghai.