China: the new normal

Endaba Group

China’s economic growth is now the slowest it’s been in a quarter of a century. It grew by 6.9% in 2015, compared with 7.3% a year earlier. This comes as the IMF reveals figures for China’s growth this year, 6.3% and 6% for 2017. However, the news that China is slowing down shouldn’t come as a surprise. For over a decade, China has been the engine of global growth with a blistering pace of economic expansion. China needed to decelerate to a more sustainable pace. This isn’t a meltdown, it’s simply a slowdown and shouldn’t evoke such a doom-mongering reaction.

The BBC reported on the dismal start to the year for global stock markets. Although China is the most outstanding example, it isn’t the only country suffering a loss. Both Frankfurt and Tokyo suffered losses of double digits, New York was 9% and London 8%. So, should we really be panicking and abandoning China? What’s the way forward?

Certainly, the economy’s traditional growth engines like manufacturing and construction are spluttering, but businesses catering to the country’s growing upper-middle classes are picking up the slack. China is still a big driver of Apple’s profit, as the company revealed its operating income from Greater China, which includes Hong Kong and Taiwan, more than doubled to $23bn in the quarter just passed. IMAX says its 275 screens in China made an average of $300,00 in the third quarter, up from $287,000 from the previous year and has another 215 screens in the pipeline. Richard Gelfond, Chief Executive of IMAX Corp, when asked how the economic slowdown is affecting them, said “When I read about the difficulties in China, it seems like a parallel universe, because I’m not experiencing that in my business.”

A recent McKinsey survey of 1,200 Chinese consumers found that 71% expect wages to increase this year, and 84% expect to spend more. That jibes with official data that show retail sales growth in September accelerated slightly from a year earlier and has accelerated modestly in four of the past five months as other economic indicators have weakened.

In line with these figures – Nike has seen sales rise 30% in the quarter ending August 31, with earnings before interest and taxes jumping 51% while Swedish retailer H&M reported sales growth of 11% in its third quarter. Starbucks opened 1.5 stores a day in China during its third quarter and has plans to open 900 stores combined in APAC region next year.  Not really a story of doom and gloom!

Our Hong Kong office had a few comments to make about the retail market:

“The retail landscape is facing many challenges: double digital losses, China stock market volatility, high rent, combined with legislative uncertainty for the territory. The boom led to an over inflation of tourist traffic, leading to over exposure with a number of brands, resulting in multiples stores in close proximity. However, strong brands continue to do well. China is a key international city and will remain so. Just look at the results of Wednesday’s Singles Day!”