How foreign groups fare in China’s slowing economy

Foreign companies operating or selling in China bucked the country’s slowdown trend last year, even as the world’s second-largest economy appears to have decelerated more than official figures suggest.

China’s biggest economic slowdown in three decades is provoking angst among companies that have become used to its booming economic expansion. The pain is not evenly spread, however, as a Financial Times data analysis shows.

China’s Slowing Pains

After three decades of strong growth, the world’s second-largest economy has been slowing down. The FT examines the implications for business and society.

Part one
The struggles of entrepreneurs

Part two
Data beyond the national GDP

Still to come…

Part three
Chinese dream readjusted for the middle class

Part four
FT reader responses

Explore more from the series here.

Overall, the revenues of 2,891 foreign non-financial companies grew 19.8 per cent last year, compared with 13.9 per cent in 2017, according to data from financial intelligence provider FactSet. Within this group, 54 per cent of companies posted faster growth rates in 2018 compared with 2017, counterbalancing the deceleration or outright revenue decline of the rest.

Energy and healthcare were winners, with growth accelerating at multinationals such as Melbourne-based BHP and Cambridge-based AstraZeneca in 2018. But those exposed to China’s consumer, retail and automotive sectors, such as French-based retailer Carrefour, suffered. Apple’s sales in China grew nearly 18 per cent in its fiscal year ending September 2018, but contracted 27 per cent during the three months to December.

In the graphic below, the FT analyses revenue growth for foreign multinationals earned in China in 2018, broken down by sector:

Beeswarm chart showing multinational companies' China-derived revenues and growth rates

Economy slowing more than figures suggest 

Last year, according to official figures, China grew at the slowest pace since 1990 and held at 6.4 per cent in the first quarter of this year. That may be the soft version of events. Many China-watchers believe its official data understates the true extent of the slowdown.

Official figures may have overstated inflation-adjusted gross domestic product growth by an average of 2 percentage points a year from 2008 to 2016, according to recent research from the Brookings Institution, a think-tank. 

Line chart showing the gap between China's official GDP growth rate and the Brookings Institution estimated rate

Rust-belt north-east first to be affected

Even if the official GDP growth rates are overstated, they still identify trends. A look at gross regional product (GRP) over the past decade paints a picture of which regions are bearing the brunt of slowing growth. 

They show the slowdown starting in the rust-belt north-east, a region where state-owned enterprises dominate. An ageing population and reliance on old-fashioned smokestack industries exacerbate these trends. 

The east coast, including the Yangtze and Pearl river deltas, remains more prosperous. Less-developed regions in central and western China are looking to catch up these coastal regions.

Internet searches show workers are worried 

Worries over job security can signal hardship in any economy, but China’s official unemployment rate is widely ridiculed as useless. It barely budges even when other data show large swings in the economy. 

Data from internet search giant Baidu offers an alternative view. The volume of keyword searches using the Chinese term for “lay-offs” (caiyuan) shows a marked upturn in late 2018 and early this year.

Line chart showing increases in Baidu searches for “layoffs” since 2008

Excavators index suggests old economy is labouring

Extraction, heavy industry and massive infrastructure projects helped build China’s economic miracle. Now, though still a driver of growth, their relative importance is falling as the economy shifts towards services. 

Digging machines are used in mining and construction, making them a useful proxy for activity in heavy industry. Excavator sales slowed sharply in late 2018 and January 2019, but picked up in February as the impact of the Chinese government’s infrastructure stimulus began to take hold.

Employment trends reveal a country in transition

As China shifts towards services, the composition of the labour force is also changing. Beginning in the mid-1990s, the number of Chinese working in services surpassed those in industry. That trend has widened over time, accelerating rapidly from 2012 onwards. 

As of 2018, the services sector employs some 125m more people than the country’s industrial core.

Line chart showing the shift in Chinese employment from industry to services since 1978

PMI surveys show manufacturing slowing

Surveys of corporate executives reinforce the view that the slowdown is a stratified affair. Both official and private surveys of manufacturing managers show consistently slower performance since 2016, while services continue to do well. 

China’s official manufacturing purchasing managers’ index (PMI) is weighted towards large state-owned enterprises, while a separate survey sponsored by Caixin, a leading financial news website, focuses on smaller, privately owned factories. Both track the same trends in manufacturing, suggesting official data here is reliable. 

Line chart showing the official China services PMI consistently outperforming manufacturing PMIs

Infrastructure stimulus ramps up

An austerity campaign targeting excessive borrowing by local governments caused a sharp drop in infrastructure investment in 2018. 

But after an 18-month-long trough from mid-2017, in which Beijing approved few new projects, the freeze is over. The state planning agency issued a raft of new approvals for public works projects in January and February to jump-start spending. 

Meanwhile, local governments have sold hundreds of billions of dollars worth of infrastructure bonds to finance the projects.

Line chart showing increasing growth in China infrastructure project spending

Additional reporting by Yizhen Jia in Shanghai and Yasemin Craggs Mersinoglu in London

Additional graphics development by Ændrew Rininsland

What off the beaten track indicators should we be looking at to gauge China’s economic health? Have you experienced the slowdown? We’d like to hear your thoughts in the comments below.

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