Last year was the year that China’s miracle growth seemed to finally level out. Economic data from Beijing released earlier this month indicated that China's economy grew just 6.9% in 2015, following 30 years of hovering around the 10% mark. It was the weakest full-year growth since 1990. The country saw the Yuan devalued, its stock market crash, and foreign exchange reserves fall to record levels, causing panic across the markets and raising concerns that the spillover could spark another financial crisis.
The are a number of reasons for this slowdown, notably the commodities market, the strong dollar, and the country’s attempt to rebalance its economy, as it looks to shift from an investment to a consumer driven economy. However, for many, the outlook appears to be improving. In Deloitte's third quarter (Q3) ‘CFO Signals’ survey, that tracks the thinking and actions of CFOs from large North American companies, just 4% of the 114 respondents said that they regarded the Chinese economy as good, compared with 23% in Q2. In the Q4 survey though, this number rose to 14%.
The response from CFOs seems to be echoed by India’s central bank governor, Raghuram Rajan, who recently argued in an interview at the World Economic Forum in Davos that ‘China is still contributing to global growth as it adjusts its currency policy and shifts to consumer-led growth. My sense is there is underlying growth in China. It’s not falling off a cliff.’ Starbucks CEO Howard Schultz has also downplayed a slowing rate of sales growth in China, and many others seem willing to believe that the slowdown is not that bad.
There are, however, many reasons to be worried. Despite Rajan’s reassuring comments that there is still underlying growth, the government knows that fiscal revenue will be disproportionately affected by even a moderate slowdown due to the overwhelmingly reliance on an industrial and property boom that now appears to be coming to its end. And the country’s unusual tax base - which sees a third of revenue coming from VAT, one-quarter from corporate taxes, and less that 10% from income tax - means it lacks the stability of revenue to cope.
There are also a number of other signs that China is not yet out of the woods. Architectural coatings sales in China declined in Q4, for one. Activity at China’s factories also cooled in December for the fifth month running. These are traditionally forward indicators of an economy bound for decline. The ineffectiveness of many of the measures introduced by Chinese policymakers should also cause concern. Interest rate cuts, for one, appear to have done little to revive growth.
Even the US presidential election could create further problems for China, with the rhetoric coming out from some of the candidates around forcing China to stop deliberately undervaluing the Yuan worrying. By most measures, the Chinese Yuan is no longer undervalued, but both Democrats and Republicans have made strong noises to the contrary, with Donald Trump particularly bullish in saying that he would force the country to stop the alleged practice. If China were to cave to this pressure, it could lead to the same sort of severe recession that followed Japan’s decision to do the same in 1987.
For Western CFOs at companies dependent on success in China, of which Apple could now be considered to be one, such instability represents huge potential issues. Many CFOs and economists looking at China appear to be less worried than they were last year. Whether this is sensible or not remains to be seen.