23 October 2019
BDA’s Mark Webster speaks to The New York Times on MNC divestments in China
October 17, 2019
SHANGHAI — China’s economic slowdown worsened in the July-to-September period, according to data released on Friday, as the trade war with the United States and a host of other problems leave Beijing struggling to meet its goals.
The figures show China continues to grow at its slowest pace in nearly three decades of modern record-keeping. While China is still expanding faster than any other major economy, Friday’s data suggest that the pace could come in at the low end of Beijing’s official target, which could add to worries about broader prospects for global growth.
China’s efforts to tame its addiction to lending and the deepening impact of the trade war have been major drags on the economy. Other problems are worsening, as the country’s vast automotive sector shrinks, as its real estate sector levels off and as its pigs die in vast numbers from a swine fever epidemic.
China’s economic output grew 6percent in the third quarter compared with a year earlier, according to official statistics, the bottom end of Beijing’s full-year target of 6 percent to 6.5 percent. In the first three-quarters of the year, its output grew 6.2 percent compared with a year ago.
China’s growth was set to slow down from the torrid pace of past years. Its economy is now twice the size it was about a decade ago. Its labor force is shrinking, and the country is already full of roads, rails and factories, limiting potential new investment.
The question is whether there are any sharp dips along the path to ever-slower growth.
“What policymakers want is to make the process as long and as gradual as possible,” said Larry Hu, the head of China economics at the Macquarie Group, a big Australian financial services company. “The biggest challenge is to find new growth drivers from consumption and technology, as old ones such as property and globalization are fading out.”
Mao Shengyong, the spokesman of the National Bureau of Statistics, said at a news briefing in Beijing that the economy was not faring so badly given global difficulties like slowing international trade. “The national economy is generally stable, the economic structure is continuously optimized, and people’s livelihood and welfare are continuously improved,” he said.
The conflict heated up in the third quarter of this year, when President Trump broadened his tariffs at the start of September to hit many consumer goods from China. Its exports to the United States plunged 22 percent in September compared with September 2018, when exporters were racing to ship their goods ahead of a previous set of tariffs.
Still, American tariffs account for only part of China’s overall economic slowdown. Exports to the United States are about 4 percent of the Chinese economy. Roughly half the value of those exports stems from imported goods like semiconductors and oil, said Nicholas Lardy, a longtime China specialist at the Peterson Institute for International Economics, so the net importance of exports to the United States is even less.
China also has ramped up exports to the developing world. As a result, its overall exports in September were down only 3.8 percent.
In fact, much of the slowdown has been domestic. China has been reluctant to force its debt-ridden financial system to lend even more money to sustain short-term economic growth.
With the conspicuous exception of the auto sector, industrial production and retail sales were fairly strong in September. As consumer confidence has eroded, however, car sales have fallen.
Car sales are 5 percent of China’s economic output, according to official statistics, meaning they play a bigger role in China’s growth than exports to the United States. Even foreign companies like General Motors assemble practically all their cars locally, with almost entirely Chinese-made parts.
But these days, households in China just aren’t buying cars the way they used to.
Retail car sales dropped 6.6 percent in September from a year earlier, a sharp drop for an industry once accustomed to double-digit annual percentage growth.
The car sales slump started in the summer of 2018 and became severe by winter. An expected improvement this summer has not happened.
Cui Dongshu, the secretary general of the Chinese Passenger Car Association, said September at least was not as bad as some recent months. “The sales are recovering but very slowly, due to weak consumption,” he said. “The purchasing power of families is still not enough.”
Chinese automakers had planned to export a lot of cars to the United States starting this winter. But Mr. Trump’s tariffs have made that much harder and have prompted one carmaker, Guangzhou Auto, to suspend indefinitely its plans to enter the American market.
Property market weakness has also pinched growth, hurting consumer sentiment. A decades-long run-up in home prices gave many in China, where the homeownership rate is high, the feeling that they were becoming prosperous enough to splurge on other purchases. But prices have mostly stabilized, and even fallen in some smaller cities, and many families are struggling with large mortgage payments.
China’s biggest challenge may be slower investment, which weakened further in September. Although state-owned enterprises continue to pour money into new projects, foreign investment has faltered, especially in September; some companies are diversifying away from China.
“We have seen a significant divestment by multinationals in this part of the world in the past 18 months,” said Mark Webster, a partner in the Shanghai office of BDA Partners, a New York investment bank that specializes in Asia deals.
The trade war is just part of the problem. Multinationals complain of much tighter regulatory actions in China, particularly antitrust cases. They also encounter extensive overcapacity in many industrial sectors, forcing companies to cut prices repeatedly to stay in business and destroying profit margins.
The volume of mergers and acquisitions by foreign companies investing in China tumbled 89 percent in the first half of this year from the same period last year, to just $6.3 billion, Mr. Webster said.