Editorials

Chinese economy sets off alarms

China’s economy is slowing and facing increasingly powerful headwinds. Economists have been watching evidence pile up for some time, but Apple CEO Tim Cook’s warning that sales of its iPhone have been slowing in China sent Apple shares, along with those of other technology companies, into a slide. Chinese authorities are trying to cushion the impact of a slowdown, but the causes are diverse, and sustained growth is increasingly difficult. Policy makers must prepare for troubles in China and protect their own economies from the fallout.

Cook was forced to revise downward Apple’s growth forecasts because of slowing iPhone sales in China. In 2015, Apple boasted of multiple quarters in which revenue growth in greater China topped 100 percent per year; in November 2018, that number plummeted to 16 percent and it is expected to fall still further. Those grim numbers sparked a 10 percent drop in Apple’s share price and worrying falls in the Dow Jones industrial average, Standard & Poor’s 500-stock index and the Nasdaq composite index.

These problems are not Apple’s alone. The stock price of Taiwanese companies that supply Apple quickly fell, as did Japanese manufacturers, such as Japan Display, which makes the liquid crystal displays for the iPhone XR. According to the Japan Machine Tool Builders’ Association, orders from China of machine tools for electrical and precision machinery plummeted over 90.6 percent from the previous year in November. Consistent with that, manufacturing indexes across Southeast Asia have all fallen in the wake of Apple’s announcement. This week, Samsung Electronics announced that it, too, would reduce its anticipated fourth-quarter profits. It blamed “mounting macro uncertainties” and “lackluster” demand for memory chips, which constitute a majority of its profits and more than a third of its sales.

Analysts say that falling demand is, again, a function of growing weakness in the China market. The Chinese cellphone market is approaching saturation, with sales falling since 2017. There is less innovation among new devices, yet prices continue to climb. In that environment, sales are expected to slow, at least among high-end manufacturers, such as Apple, that charge as much as $1,000 a handset.

Similar difficulties are being experienced across a range of industries. Automobile manufacturers report sustained downturns in their sales in China; the last such period was in the wake of the Asian financial crisis of the late 1990s. Retailers ranging from Target to Tiffany’s are hurting as Chinese consumers slow their purchases.

Those companies’ troubles reflect the larger set of difficulties that China faces. The International Monetary Fund estimates that the Chinese economy will grow 6.2 percent in 2019. The Chinese Academy of Social Sciences expects slightly higher growth (6.3 percent) but recently cut its forecasts. A sustained trade war with the United States could cut growth more, and the uncertainty engendered by that conflict is anticipated to slow consumer spending in China, which would ripple through the economy. Economic advisers to U.S. President Donald Trump believe that China is more vulnerable to a trade war than is the U.S. — given the disproportionate size of its exports to America — which encourages Washington to take a harder line in trade negotiations.

Slowing GDP growth is not the only warning light blinking red. Factory output in China contracted for the first time in two years. Exports, which increased 15.5 percent in October, grew just 5.4 percent in November. Retail sales increased 8.1 percent in November, the slowest growth in 15 years. Profits at industrial companies fell in November, their first decrease in nearly three years. Also in November, property sales fell 5.1 percent, the biggest monthly fall since early 2015.

The government is responding. The reserve requirement ratio, the amount of cash banks have to have on hand as protection against losses, has been cut by 100 basis points, or 1 percent, to allow banks to continue lending. That should add 800 billion yuan ($117 billion) of liquidity to the economy. This is the first such cut in 2019, and the fifth in one year by the Chinese central bank. Additional cuts are expected. The central government also recently approved rail projects worth more than $125 billion in steps that would inject money into a faltering economy. A year ago, it was halting such projects for fear that they would add unsustainable debt to local finances. Local and provincial governments have also reportedly been told to ease restrictions on lending for real estate as well to ensure that the driver of economic activity is not unduly slowed.

While some will see China’s problems as opportunities, the reality is that China’s ills cannot be contained. Alarm bells in China should set off similar warnings in Asia and beyond.

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