adminChina, the world’s second-largest economy, has a few problems. The lingering hangover of pandemic controls, an ailing real-estate market and a strenuous tug-of-war with one of its biggest trading partners — the U.S. — may put a dent in its recovery.
“You could say that the U.S. has been the tortoise in the lead and China has been the hare,” David Garfield, managing partner and global head of industries at AlixPartners, said about China’s ambition to overtake the U.S. as the No. 1 economy. “The hare is racing and catching up, but now it is wounded in some way.”
China’s economic output is on track to grow 5% this year, but will see its GDP decline next year, growing by 3.5%, the International Monetary Fund (IMF) estimates.
The country’s economy is showing signs of fatigue as the Shanghai Stock Exchange (SSE) is down over 10% from its May trading levels, while the Hong Kong’s Hang Seng Index (HSI) has officially entered bear-market territory, down 20% from its January highs. Still, China remains the global powerhouse in manufacturing with 27% of its GDP coming from large-scale electronics and industrial production. But U.S. companies are eagerly looking to set up shop elsewhere, as China’s once-welcoming air dissipates and operating on its land carries more risks.
“U.S. and Western companies may face tough regulations,” said Emily Murphy, deputy director and senior fellow at the Center for Strategic and International Studies. “Random security checks or even bans are a form of retaliation for some of our own policies.”
Earlier this year, Beijing cracked down on U.S. chip giant Micron Technology
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which derived 10% of its profits from China. The decision, which China attributed to safety risks, came on the heels of Washington’s move to restrict the export of advanced technologies to China in 2022.
“Those U.S. companies are in the best positions here who have started to diversify away,” Garfield said. “Apple has been particularly smart.”
In 2022, nearly 80% of Apple’s suppliers had a presence in China and in 2023 about 95% of its iPhones were still manufactured there through its biggest contractor, Foxconn, which is currently undergoing a tax audit and a land use investigation by Chinese officials. Apple
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built an “iPhone city” in Zhengzhou where it employs more than 300,000 people, and until the fall of 2023, it was the top smartphone seller in the nation.
“When China’s economy slows, it impacts producers and prices in the commodity markets worldwide,” said Garfield. “When capital investment slows down in China, then companies that sell equipment and components into China see their sales struggle. Then you have the slowing consumer demand that can cause additional headaches.”
The French luxury giant LVMH Moët Hennessy has seen an overall global growth of 11% between 2022 and 2023 for its fashion and leather goods group, which is a modest expansion compared with its growth of over 30% between 2021 and 2022. The company’s slump in profits can be attributed to slowing China sales, as big spenders have stopped splurging on luxury goods, UBS noted.
“Demand is also hitting the electric-vehicle market,” Garfield said. “China is one of the biggest markets for EVs, so the ripple effects are significant.”
Between 2016 and 2022, China spent $57 billion to subsidize EV purchases, according to AlixPartners. Last year alone, more than 25% of cars sold in China were electric, compared with 13% globally. Tesla
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the American EV giant, has one of its largest factories in Shanghai and now offers its Model S and Model X with a nearly 7% discount as competition heats up from the likes of Nio, China’s own EV maker. Nio, once dubbed the “Tesla Killer,” is facing financing difficulties and recently issued convertible bonds valued at $1 billion to stay afloat. Its share price has lost 87% of its value, down from its 2021 January levels of $65 per share to $8.9 a share as of Oct. 24, 2023.
“Despite the difficulties, the automotive industry continues to do well, then there are other bright spots,” said Garfield. “China is particularly strong, when it comes to the battery-manufacturing segment.”
China has a monopoly on making batteries, Gavekal Research noted. China refines 60% of the world’s lithium — an essential element for EV batteries — and by 2030, 75% of battery-production facilities in the pipeline will be located there.
“Regardless of all the internal troubles, manufacturing remains the strongest aspect of China’s economy,” Murphy said. “You will have to keep working with China unless you want to pay ten times more for commodities, electronics or just about anything. They simply have the infrastructure.”
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