How bad is China’s economic slowdown?

IF CHINA’s economy is weakening, someone forgot to tell Jasmine Wang.

“My parents haven’t asked me to cut back my spending,” says Wang, a 22-yearold graduate student in Beijing who collects limited-edition fragrances from brands like Chanel and Guerlain that can cost up to $300 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.

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 percent 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 profit warnings.

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.

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.”

Tough read

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.”

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 quickly worsen.

“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 toy- maker 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 capacity available.”

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 January 1.

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 wid- ening 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 sup- ply chain.

“The trade dispute has had a negative impact on the global economy, and the German automotive industry in particu- lar,” Daimler CEO Dieter Zetsche said on Wednesday, noting the impact on Mercedes SUVs imported to China from its factory in Alabama.

Across 195 fourth-quarter earnings calls of S&P 500 firms analysed by Bloomberg Intelligence, 100 companies cited a slowdown in China, according to a February 4 report. — Reuters.