A prolonged housing market slowdown and high levels of job insecurity have knocked the wind out of a fragile recovery in China, a global trading power, and the effects of its slowdown can be felt across borders.
Global burger chains and automakers are increasingly feeling the effects of a faltering recovery in the world's second-largest economy, China, and are bracing for a bumpy ride.
A prolonged housing market slowdown and high levels of job insecurity have knocked the wind out of a fragile recovery in China, a global trading power, and the effects of its slowdown can be felt across borders.
Coffee chain Starbucks, automaker General Motors and technology companies hit by restrictions on exports to China are among those that have raised the alarm about the country's weakness. The Chinese government's stimulus measures have so far failed to boost consumption, and the over-indebted housing market has made consumers less likely to spend.
"It's a tough market right now. And, frankly, it's unsustainable, because the number of companies losing money there can't continue indefinitely," General Motors CEO Mary Barra said last week when the division of the automotive in China went from being a profit driver to a drain on its finances.
China's $18.6 trillion economy grew more slowly than expected in the second quarter, and cautious households are stockpiling savings and paying down debt. Retail sales growth sank to an 18-month low in June, and companies cut prices on everything from cars to food and clothing.
In a bid to stem the decline, China last month outlined targeted stimulus for consumers to support equipment upgrades and trade-ins of consumer goods, but that has not eased concerns.
Some analysts have warned that unless there is structural change that gives consumers a greater role in the economy, the current trajectory fuels the risks of a prolonged period of near-stagnation and persistent threats of deflation.
"There is deep concern that Beijing is not introducing the kind of stimulus that will help broaden the economic base," said Quincy Krosby, chief global strategist at LPL Financial.
"It is becoming increasingly difficult for American companies to view the Chinese market as a reliable partner."
China continued to be a drag on Apple last quarter. The iPhone maker's sales fell a much steeper-than-expected 6.5% in the country, which represents a fifth of its total revenue.
French cosmetics giant L'Oreal said the Chinese beauty market will remain slightly negative in the second half of 2024 with no visible improvement in sentiment.
Sales at other consumer companies have also taken a hit, including Starbucks, McDonald's and Procter & Gamble, while weak domestic travel demand prompted a revenue warning from Marriott.
The slow growth was also evident in disappointing results from luxury goods makers LVMH and Kering, which owns Gucci, and profit warnings from Burberry and Hugo Boss.
"The world was shocked by how weak China was economically as it developed this year," said Marc Casper, chief executive of medical equipment maker Thermo Fisher.
Meanwhile, foreign automakers, from Tesla to BMW, Audi and Mercedes, are locked in an intense price war in China after ceding market share to domestic electric vehicle makers, led by BYD, which offer models of high technology and low cost.
To be sure, the MSCI World with China Exposure index, which tracks 52 companies with high revenue exposure to China, is up 11.6% this year, not far behind a 12% rise in the broad gauge of global stocks. MSCI.
However, most of the China-focused index's performance is due to a rise in semiconductor stocks, including Broadcom and Qualcomm, which have benefited from AI-driven demand.
POLITICAL CHALLENGES
Rising trade tensions between China and the United States and certain domestic policies have contributed to the problems of multinational companies.
Beijing's anti-corruption campaign that began last year has caused disruption that in part led GE HealthCare to lower its revenue growth forecast and raised concerns about sales of Merck's Gardasil vaccine.
Meanwhile, tighter restrictions on U.S. exports to China to share high-end chip technology are preventing chipmakers from serving one of the largest semiconductor markets.
Qualcomm said it took a hit to revenue due to US restrictions on exports to China, eclipsing its optimistic forecast on Wednesday.
Analysts said the pressures are unlikely to ease soon.
"It's been a surprise that (the slowdown) has lasted this long," said Stuart Cole, chief macroeconomist at Equiti Capital.
"Once Covid restrictions were lifted, the general expectation was that China would recover. But the pace of Chinese expansion we saw previously will not be seen any time soon."
