BEIIJING — As the world frets over whether one of its major stalwarts of economic growth is beginning to falter, the message from China’s leaders is clear: Things aren’t nearly as bad as they might seem.
Chinese government and banking officials have been working overtime of late to reassure the public that the economy is on solid footing despite a recent string of less-than-stellar economic data. Some economic analysts even fear the country’s growth rate could soon dip to levels not seen in more than a decade. The deceleration appears to be denting luxury goods players’ performance and expansion plans along the way.
In April, China’s first-quarter economic growth rate of 8.1 percent was the lowest increase in more than three years. That’s still far faster than other major economies, but not as fast as needed to sustain the momentum that has taken China from economic backwater to world powerhouse in three decades. China’s economy expanded by 9.2 percent last year, so the slowdown is causing serious concern.
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On Thursday, one closely watched measure of production fell to the lowest level since December. The HSBC Flash Purchasing Managers Index registered at a level of below 50 for the eighth month in a row, widely regarded as a sign that manufacturing continues to shrink.
Some analysts are predicting that second-quarter GDP could slow to as much as 7.5 percent or even come in at under 7 percent, although many expect the economy to rebound later this year. Credit Suisse Group AG predicts 7.7 percent growth for full-year 2012 while Deutsche Bank expects 7.9 percent growth. China’s own 2012 growth target is for 7.5 percent.
While that level of growth would be enviable for many a country, China’s slowdown is prompting questions in financial circles. The country’s economic growth is still a long way off the heady days of pre-2008, before the global economic crisis, when China boosted government spending on infrastructure to bolster the domestic economy through the world meltdown.
The slowdown has prompted the government to respond and defend the health of its economy.
China president Hu Jintao, who rarely grants interviews to any media, told a Mexican newspaper in writing during the G-20 summit that China’s economy will weather the storm. Hu, in comments later published by China’s official Xinhua news service, said the country’s leadership — which is set to change over in the coming months – is intent on economic stability.
“Facing a complex and grave external economic environment, China has taken targeted measures to strengthen and improve macroeconomic regulation, accelerate the shift of the growth model, adjust economic structure and build long-term mechanisms to boost domestic demand,” Hu reportedly said to the Reforma newspaper, according to Xinhua. “We are confident that China will maintain steady and robust growth and thus make solid contribution to global economic growth.”
This week, the country’s top legislative body released a directive saying that incremental steps should be taken to avoid major slowdowns, but there is no indication of a new stimulus effort to come.
The China Daily newspaper quoted a directive Tuesday from the Standing Committee of the Chinese People’s Political Consultative Conference National Committee, the country’s top political advisory body.
“Fiscal policy should be really proactive, reflected in more intensified tax cuts for small and micro-sized enterprises, especially in the emerging and modern service sectors, to reduce costs and promote profits for companies,” it said.
It’s clear that major trouble spots remain, like China’s overdeveloped property sector, where prices are falling rapidly. As of yet, it’s unclear how Beijing will manage the coming months, particularly as it navigates through the turbulence of a rare and secretive transition to a new president and leadership team.
“The government isn’t likely to employ any economic stimulus measures at this time, but the situation is not too dire,” said Wen Yuanli, an independent Chinese economist. He said the government still has massive reserves to boost the economy it could use in case of emergency.
Meanwhile, luxury goods companies have seen a deceleration in their sales in China in recent months, noted JP Morgan analyst Melanie Flouquet.
Her research, distributed Wednesday, noted decelerating organic sales growth in China for several luxury players for the first quarter of 2012 compared with the latter part of 2011. These companies included LVMH Moët Hennessy Louis Vuitton, Hugo Boss, Burberry and Prada.
Flouquet said there are some short-term factors behind the slowdown, including a “cooling of gift giving” ahead of the government change and the fact that Chinese shoppers are choosing to spend more when they travel abroad than they do at home.
But she also said there are indications of a longer-term softening of the market, including “unsupportive” demographics regarding low levels of new entries in the workforce. The market might be more mature and price sensitive than previously thought, she added.
“Bullish investors would be right to stress that the deceleration of luxury goods sales in China is only over one quarter, and a quarter blurred by the Chinese New Year at that. Still, it was broad based across most companies and product categories. In addition, it is striking that it is an area of focus to most luxury executives with a number of senior management and chairmen flying to China to feel the pulse of the market and gain a better understanding of the situation,” she said.
The analyst said a number of companies are talking about “pausing” their sharp expansion in China of recent years to consolidate their presence in the country, she said, adding that this was the case for Richemont, LVMH and PPR.
In a recent report, CBRE Global Research and Consulting executives said that China’s slowing economy is not significantly impacting the construction industry so far. But CBRE said brands, particularly those in the luxury sector, are slowing down their expansion for a couple different reasons.
There is a lack of premium properties available across the country and companies are making more educated decisions in terms of where they want their brands to be located, the researchers concluded. Brands have realized that breakneck expansion may not be the best play for them going forward in China, according to CBRE.
“I would say today we are seeing more prudent choices being made,” said Sebastian Skiff, executive director of CBRE’s retail operations in Asia. “The rush is not as robust as before.”