Commentary on Political Economy

Sunday 13 January 2019


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Clouds loom over global business as Chinese economy falters From cars to smartphones, signs of weakening demand worry multinationals Softness in Chinese consumption is worrying global luxury brands © Reuters Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Share Save Save to myFT Lucy Hornby in Beijing and Chris Giles in London 2 HOURS AGO Print this page0 Emma Liu has a good job in Beijing, but she has decided to forgo her normal Giorgio Armani face cream and started buying cheaper sweaters online. Her choices are reverberating in boardrooms around the world. A slowdown in the Chinese economy — and flagging consumer expectations — are clouding the outlook for foreign brands. From VW to Apple, the Chinese economy is now the world’s business. No international brand can safely ignore China’s economic prospects. On a market exchange-rate basis, China accounted for 16 per cent of the global economy in 2018. But for global businesses, what matters more is growth. China’s rapid development and 1.4bn consumers have helped it to account for about 30 per cent of worldwide growth for the past decade even as its domestic expansion has slowed. If the Chinese consumer decides to hold back, companies around the world will tremble. “I don’t feel any pressure at work,” the 20-something Ms Liu told the Financial Times. “I just feel like I need to use my money more wisely because saving would give me a greater sense of security.” China’s rift with the US has compounded fears for the global economy. The trade war may have had little direct effect on global trade volumes, but it has undermined business confidence. Manufacturing has been particularly affected, with sentiment and output indicators in the US, Europe and Asia performing poorly. Financial markets are worried and economists are rapidly revising down global growth forecasts. The World Bank said on January 8 that “storm clouds are brewing for the global economy”. There have been sharp drops in stock and oil prices over the past three months while there is a widely held expectation that interest rates will rise.  Although there are also reasons not to be alarmed — European employment growth remains strong, most US data are still robust and there are many one-off reasons for recent weakness in Asian and European economic data — few look at the signals from the Chinese consumer and feel reassured. Chinese automotive sales fell for the first time in 28 years in 2018, official data are expected to show, after tax breaks expired early in the year. “The willingness to buy big-ticket items such as cars has come down substantially,” said Louis Kuijs, head of Asia for Oxford Economics. The car sector represents about 5 per cent of China’s gross domestic product and 30 per cent of the global market.  It is one of many warnings that the Chinese consumer can no longer be counted on to drive global sales for multinationals struggling with lacklustre demand in their home markets. The gloom extends to real estate, the ultimate barometer of Chinese consumer confidence. The property arm of China Merchants Group, a conglomerate, recently offered to throw in a BMW for anyone who bought an apartment in a soggy industrial district of Shanghai. Regulators quickly squelched the gimmick. The offer “no longer stands”, a local salesman told the FT glumly. In Beijing, developers who once demanded a 30 per cent downpayment now accept deposits of 10 per cent to spur sales. “I think this time is different,” said Mr Lu, a property salesman who declined to provide his given name. “This time I think customers are truly out of money.” When Apple blamed China for its revenue warning early in January, it made headlines. But the slowdown in the tech group’s sales has also hit the share prices of its supply-chain companies, including Foxconn, the world’s largest private employer. Overall, smartphone sales are down and Samsung too has projected its first drop in operating profit in two years. Other indicators are also bearish. Hong Kong jewellery sales — a traditional yardstick for spending by wealthy mainlanders — are down, Jefferies, an investment bank, wrote in an analyst note. Furniture sales growth of about 6 per cent through November 2018 is half that of the previous year. Growth in cosmetics sales slipped to 10.5 per cent, from 13.5 per cent the year before. The number of overseas trips by Chinese tourists stagnated in the second half in 2018, although domestic tourism fared better. Only 69m tourists, roughly equal to the second half of 2017, travelled abroad, according to initial estimates released this week by the state-run China Tourism Academy. That was sharply down from growth of 15 per cent in the first half of 2018. Recommended The Big Read Nervous markets: how vulnerable is China’s economy The sharp drop in global oil prices from $85 a barrel in October to $60 on Friday will increase the purchasing power of global consumers, but that might fail to raise growth rates sufficiently to offset other headwinds. Chinese oil companies led by Sinopec are reeling from a slowdown in second-half domestic consumption, coupled by an unexpected glut of global crude supply that has pushed prices to 18-month lows. The trends, especially in the face of the trade tension, have worried Beijing. China’s central bank has loosened monetary policies to stimulate growth. The Chinese government has promised new loans to small businesses and measures to extend credit deep into the countryside, following several years of credit tightening. “We think policymakers will aim to halt the slowdown in growth, rather than try and engineer a significant pick-up in growth,” Mr Kuijs said. Even if successful, China’s stimulus policies have traditionally helped the large industrial sectors rather than encouraged consumers to spend. Until the mood in China changes, foreign brands will have to look elsewhere for growth.

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