You are here

How bad really is China's slowdown? It all depends on what you sell

While owners of fashion brands and alcoholic beverages are upbeat, a majority of firms have issued warnings

A Louis Vuitton store on Canton Road, Tsim Sha Tsui district, Hong Kong. Fashion labels are bucking the trend and remaining bullish about China, while other industries see nothing but doom and gloom.

New York

IF CHINA'S economy is weakening, someone forgot to tell Jasmine Wang.

"My parents haven't asked me to cut back my spending," says Ms Wang, a 22-year-old graduate student in Beijing who collects limited-edition fragrances from brands such as Chanel and Guerlain that can cost up to US$300 each. She said her parents are paying her monthly bills of about 6,000 to 8,000 yuan (S$1,204 to S$1,605) and will keep supporting her if she struggles to find a job.

Ms 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 Inc, Caterpillar Inc, Volkswagen AG 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 such as Ms Wang.

Your feedback is important to us

Tell us what you think. Email us at

"We are not seeing a slowdown," said Patrice Louvet, chief executive officer of Ralph Lauren Corp, where revenue in China grew 19 per cent 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 in addition to Ralph Lauren, Paris-based luxury giant LVMH and UK distiller Diageo plc are upbeat about business in the Asian nation. And earnings reports this week from L'Oreal SA, Pernod Ricard SA and Capri Holdings Ltd - the owner of the Jimmy Choo and Versace labels - 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 such as 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," Mr 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 Mr 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," Mr Miller said. "You will absolutely see a crisis in China."

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 get - if not discounts - more advantageous pricing," Mr 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 Jan 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 widening since the tariffs were put in place last year.

The slowdown has hit a wide variety of products: from cars and car parts to Tupperware Brands Corp containers and computer chips. Across 195 fourth-quarter earnings calls analysed by Bloomberg Intelligence, 100 companies cited a slowdown in China, according to a Feb 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 manufacturers. "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 per cent 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 stand-off with Mr Trump, many executives are expecting more this year.

Eaton Corp, a Cleveland-based conglomerate, said its China unit continued to perform well last quarter, citing in particular a more than 20 per cent 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 Jan 31 conference call. BLOOMBERG

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to