Global companies across various industries are increasingly feeling the strain from a faltering recovery in China, the world’s second-largest economy. The economic slowdown in China, marked by a persistent downturn in the property market and rising job insecurity, has had far-reaching effects on businesses worldwide. From fast-food chains to automobile manufacturers, many firms are grappling with the repercussions of China’s economic struggles.
The situation in China has been dire, with the country’s $18.6 trillion economy growing at a slower-than-expected pace in the second quarter of the year. This underperformance is reflected in a range of economic indicators. Retail sales growth dropped to an 18-month low in June, indicating a significant decline in consumer spending. In response to this subdued demand, businesses across various sectors, including automotive and consumer goods, have been forced to reduce prices to attract customers. Despite these efforts, the economic slowdown persists, and there are no signs of a swift recovery.
Key global companies have voiced their concerns about the challenging market conditions in China. Starbucks, for instance, has experienced a notable decline in consumer spending within the Chinese market, which had previously been a significant driver of growth for the coffee chain. General Motors has similarly felt the impact of China’s economic difficulties. Once a profitable segment for the automaker, its Chinese division has now become a financial drain. General Motors CEO Mary Barra has acknowledged the unsustainable nature of these losses, highlighting the deepening challenges the company faces in China.
China’s government has attempted to counteract the economic downturn with various stimulus measures aimed at boosting consumer spending and supporting sectors such as equipment upgrades and consumer goods trade-ins. However, these measures have thus far been insufficient to reverse the economic malaise. The overleveraged property market remains a significant burden on the economy, and consumer confidence has been severely affected, with many opting to save rather than spend.
Analysts are concerned that without a substantial structural shift to stimulate broader economic engagement, China may face a prolonged period of stagnation and persistent deflationary pressures. Quincy Krosby, chief global strategist for LPL Financial, has expressed doubts about the effectiveness of the current stimulus measures, suggesting that they may not be adequate to foster a meaningful economic recovery. There is a growing sentiment that China needs to implement more comprehensive and effective policies to stabilize and grow its economy.
The impact of China’s economic slowdown extends well beyond its borders. Global companies that rely heavily on the Chinese market are finding it increasingly difficult to maintain their growth trajectories. For example, Apple has reported a sharp decline in sales in China, with a 6.5% drop in revenue from the country. This decline is particularly concerning given that China accounts for approximately 20% of Apple’s total revenue. Similarly, French cosmetics giant L’Oreal has forecasted a continued decline in the Chinese beauty market into the latter half of 2024, reflecting the broader challenges facing the consumer sector.
The sluggish growth in China is also evident in the results of luxury goods makers such as LVMH and Kering, which have reported underwhelming performance. Additionally, high-profile fashion brands like Burberry and Hugo Boss have issued profit warnings, further highlighting the difficulties in this key market.
The broader economic landscape is complicated by geopolitical tensions and domestic policy issues. Beijing’s anti-corruption campaign, which began last year, has led to disruptions that have affected various companies, including GE HealthCare and Merck. These disruptions have contributed to a lower revenue growth forecast and raised concerns about sales of products such as Merck’s Gardasil vaccine. Additionally, tighter U.S. export restrictions on high-end chip technology have hindered semiconductor companies from serving the Chinese market, impacting firms like Qualcomm.
Despite these challenges, there have been some positive developments. The MSCI World with China Exposure Index, which tracks companies with significant revenue exposure to China, has risen by 11.6% this year. This increase is largely driven by gains in semiconductor stocks, which have benefited from strong demand driven by advancements in artificial intelligence. However, this positive performance stands in contrast to the broader economic difficulties faced by many companies operating in or dependent on the Chinese market.
Stuart Cole, chief macroeconomist at Equiti Capital, has remarked on the unexpected duration of China’s economic slowdown. The initial expectation was that the economy would rebound quickly once COVID-19 restrictions were lifted, but the pace of recovery has been slower than anticipated. The pre-pandemic levels of economic expansion in China are unlikely to be seen in the near future, adding to the uncertainty and challenges faced by global businesses.