China’s weak economic recovery from three years of Covid restrictions, a crackdown on the private sector and an ailing property market underscores that the world’s second largest economy is entering a period of slower growth. That will create ripples around the world, especially for the multinational companies that rely on China as a major source of growth.
Chinese policy makers are reluctant to use debt-fueled stimulus to revive its ailing property market. Chinese leader Xi Jinping has spent years trying to deflate a property bubble and rein in risks within shadow banking.
Though Beijing has taken some steps to relax payment restrictions and lower deposit rates nationally to woo home buyers, economists don’t see a return to a property boom. Instead, they see property, which accounted for a quarter of economic activity, to take up a smaller share over time.
More stimulus is likely to try to abate flagging confidence among companies, investors, and consumers, analysts say. Still, economists see slower growth. JPMorgan’s economists lowered their outlook for 2023 growth to 4.8%, down from 5%, and just 4.2% next year, down from its earlier projection of 4.7%. That slower growth will most directly impact neighboring emerging markets in Asia, with a one-percentage point Chinese GDP shock contributing to a 0.6% point hit to the rest of the region, according to JPMorgan.
| Company / Ticker | Price | % Rev from China | Forward P/E | Market Cap (bil) | |
|---|---|---|---|---|---|
| Rio Tinto / RIO | $63.50 | 54% | 9.37 | $82.4 | |
| Wynn Resorts / WYNN | 101.38 | 43 | 21.72 | 11.6 | |
| Las Vegas Sands / LVS | 54.86 | 40 | 17.46 | 41.9 | |
| Swatch Group / SWGAY | 14.25 | 32 | 11.79 | 12.7 | |
| Porsche AG / DRPRY | 10.68 | 31 | 15.53 | 92.6 | |
| Bayerische Motoren Werke / BMW.Germany | EUR96.97 | 29 | 5.55 | 61.4 | |
| Anglo Americana / AAL.London | GBP2100.5 | 26 | 8.48 | 25.7 | |
| Compagnie Financiere Richemont / CFR.Switzerland | CHF125.6 | 25 | 16.12 | 72.2 | |
| Georg Fischer / GF.Switzerland | CHF57.2 | 23 | 14.76 | 4.7 | |
| Atlas Copco / ATLCY | $11.75 | 23 | 24.34 | 683.9 | |
| Tesla / TSLA | $258.08 | 22 | 51.21 | 819.1 | |
| Volvo Car / VLVCY | $7.61 | 22 | 8.16 | 124.3 | |
| Mettler-Toledo International / MTD | $1,213.48 | 22 | 26.85 | 26.5 | |
| BorgWarner / BWA | $40.75 | 21 | 9.55 | 9.6 | |
| Antofagasta / ANFGF | $18 | 21 | 22.39 | 14.3 |
Source: Bloomberg
It also creates challenges for global companies that have relied on China as an engine of growth, including commodity producers in Latin America and Australia. A Chinese property boom that fuels demand for metals like copper and steel now seems unlikely. Global automakers, industrial companies and consumer giants are also seeing weaker demand as Chinese consumers and businesses remain skittish about spending and competition from local players intensifies.
Orders for heavy machinery are slowing.
Caterpillar
(ticker: CAT) noted that Chinese demand was worse last quarter than its already lowered projections. Geopolitical tensions with the U.S. are also pushing Chinese companies to reduce their reliance on foreign suppliers, a potential challenge for global industrial companies.
Exporting rivals of China are also vulnerable as the yuan continues to weaken, now near 15-year lows versus the dollar. Economists expect China to let the yuan weaken further, albeit in a gradual and measured way, to help the competitiveness of its own exporters.
Instead of driving global growth by scooping up commodities, capital goods and consumer products, China’s shift toward slower growth could pose a challenge for foreign companies. A weaker yen will make Chinese companies more competitive in a host of areas, from technology to aerospace.
“This is the first time ever that a low-income country can produce tech at such a high level,” says Rory Green, head of China and Asia research for TS Lombard, noting China’s ability to produce seven nanometer chips and airplanes.
Barron’s looked for large multinational companies in the Stoxx 600 and
S&P 500
that broke out the share of revenue that came from China to find those that could get hurt by China’s weaker economy. Semiconductor-related companies like
Qualcomm
(QCOM) dominate the list of companies with the most sales in China. But since the chips often go into products sold elsewhere, we excluded those and focused on other companies with more than 20% of sales from China.
It isn’t an exhaustive list since some companies don’t break out China revenue and only offer revenue from Asia. But this offers a starting point for investors monitoring companies that could come under further pressure, especially if Beijing is unable to stimulate the economy enough to revive confidence.
Commodity producers, especially those making materials for property construction, could see slower demand.
Rio Tinto
(RIO) topped the list, with roughly half its revenue coming from China.
Anglo American
(AAL. London) and Chilean copper producer
Antofagasta
(ANFGF) are getting a quarter and a fifth of sales from the country, respectively.
Industrial companies like
Mettler Toledo
(MTD), which makes precision instruments and services, warned that Chinese demand has “deteriorated sharply” and that it sees lower sales for the remainder of the year.
Affected consumer-oriented companies include luxury makers like
Swatch Group
(SWGAF) and
Cie. Financière Richemont
(CFRUY). If Chinese consumer confidence continues to take a hit, especially among higher-income households, trusts or wealth management products could come under duress.
German automakers like
BMW
and
Porsche
are also vulnerable, not just from consumers wary of spending on big-ticket items but also as Chinese rivals like electric car maker
BYD
(BYD) gain share and pushes into Europe. A weaker yuan gives local rivals an additional competitive boost.
Write to Reshma Kapadia at [email protected]
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