China’s sluggish economic recovery is increasingly impacting global businesses, from chain hamburger stores to automobile manufacturers. This situation seems unlikely to be overcome in the short term.
According to Reuters analysis, China’s long-term stagnant real estate market and general lack of employment security have left the country’s fragile economic recovery even more unstable, with the slowdown in China’s economy already affecting international enterprises.
Coffee chain Starbucks, automobile manufacturer General Motors, and technology companies impacted by China’s export restrictions have all sounded alarms about the softening Chinese economy. The Chinese government’s stimulus measures have so far failed to effectively boost consumption, coupled with the heavy debt burden in the real estate market leading to a decrease in consumer purchasing intent.
General Motors CEO Mary Barra stated last week, “The current (Chinese) market situation is difficult, with the number of companies posting losses continuously increasing. Frankly, this situation is unsustainable.” General Motors’ business in China has transitioned from previously profitable to a financial burden for the company.
China’s economic growth in the second quarter fell short of expectations, with household consumer spending becoming more cautious. Retail sales growth in June hit a 18-month low, with companies in sectors from automobiles and food to clothing offering discounts to stimulate sales.
To prevent further economic decline, the Chinese Communist Party introduced stimulus policies targeting consumers last month to support equipment upgrades and trade-ins for new goods, but these measures have not eliminated concerns among the populace.
Analysts have issued warnings that without structural reforms in Beijing to empower consumers in the economy, the current development model could exacerbate long-term economic stagnation and the ongoing threat of deflation.
Quincy Krosby, Chief Global Strategist at LPL Financial, remarked, “The Chinese government has not introduced stimulus policies conducive to expanding the economic base, causing deep concerns among the people.”
“U.S. companies are finding it increasingly challenging to view the Chinese market as a reliable partner.”
Last quarter, Apple continued to be dragged down by the Chinese market. The iPhone manufacturer saw a 6.5% decline in sales in China, well above expectations, with the Chinese market accounting for one-fifth of its total revenue.
French cosmetics giant L’Oreal stated that a slump in the Chinese beauty market is expected to persist in the second half of 2024, with no clear signs of improvement in market sentiment yet.
From Starbucks, McDonald’s, to Procter & Gamble, sales of other consumer companies have also been affected. Amid weak domestic travel demand, Marriott issued a revenue warning.
Luxury goods manufacturers LVMH and Kering, which owns Gucci, have underperformed, while British brand Burberry and German company Hugo Boss issued profit warnings, highlighting China’s lackluster economic growth.
Marc Casper, CEO of medical equipment manufacturer Thermo Fisher, commented, “The degree of economic sluggishness in China this year has surprised the world.”
Meanwhile, domestic electric vehicle manufacturers like BYD have launched low-cost models, sparking a fierce price war in China that has drawn in foreign manufacturers like Tesla, BMW, Audi, and Mercedes.
As tensions in U.S.-China trade escalate, Beijing’s crackdown on various grounds has further exacerbated the situation for multinational corporations.
Analysts say the pressure is unlikely to ease anytime soon.
Stuart Cole, Chief Macroeconomist at Equiti Capital, noted, “The sustained duration of this economic slowdown is surprising.”
“With COVID restrictions lifted, people generally anticipated a rebound in the Chinese economy.” He added, “However, such a scenario seems unlikely to materialize in the short term.”