World faces new reality where China's no longer a sure winner

Large parts of the Chinese service sector, like restaurants and healthcare, continue to grow and support the economy. But the signs in industrial sectors, in which other countries and foreign companies have the greatest stake through trade, paint a d
Large parts of the Chinese service sector, like restaurants and healthcare, continue to grow and support the economy. But the signs in industrial sectors, in which other countries and foreign companies have the greatest stake through trade, paint a darker picture.PHOTO: REUTERS

Deepening fears about its economy is forcing a rethink among global industries that built their strategies around its rise

HONG KONG • Commodities giant BHP Billiton spent heavily for years, mining iron ore across Australia, digging for copper in Chile and pumping oil off the coast of Trinidad. The company could be confident in its direction as commodities orders surged from its biggest and best customer, China.

Now, BHP is pulling back, faced with a slowing Chinese economy that will no longer be the same dominant force in commodities.

Profit is falling and the company is cutting its exploration budget by more than two-thirds.

China's rapid growth over the last decade reshaped the world economy, creating a powerful driver of corporate strategies, financial markets and geopolitical decisions.

China seemed to have a one-way trajectory, a momentum that would provide a steady source of profit and capital.

GLOBAL SHOCK WAVES

The entire world is focusing now on China, watching this crisis unfold. Brazil is already feeling the effects of China's deceleration. If the situation gets worse, the impact will get bigger.

MR ARMANDO MONTEIRO NETO, Brazil's Minister of Development, Industry and Trade, on China's slowdown

But deepening economic fears about China, which culminated this week in a global market rout, are now forcing a broad rethinking of the conventional wisdom. Even as markets show signs of stabilising, the resulting shock waves could be lasting, by exposing a new reality that China is no longer a sure bet.

China conundrum

China, while still a large and pervasive presence in the global economy, is now exporting uncertainty around the world with the potential for choppier growth and volatile swings. The tectonic shift is forcing a gut check in industries that have built their strategies and plotted their profits around China's rise.

Industrial and commodity multinationals are scrambling to stem the profit slide from weaker consumption. Caterpillar cut factory production, with sales of construction equipment in China dropping by half in the first six months of the year.

Smartphone makers, car manufacturers and retailers wonder about the staying power of Chinese buyers, even if it is not shaking their bottom line at this point.

General Motors and Ford factories have been shipping fewer cars to Chinese dealerships this summer. It is not just companies reassessing their assumptions.

Russia had been turning to China to fill the financial gap left by low oil prices and Western sanctions.

Venezuela, Nigeria and Ukraine have been heavily dependent on investments and low-cost loans from China. The pain has been particularly acute for Brazil. The country is already faltering, as weaker Chinese imports of minerals and soya beans have jolted all of Latin America.

The uncertainty over China could limit the manoeuvring room for officials to address the sluggish Brazilian economy at a time when resentment is festering over proposed austerity measures.

The weakness in China is even compelling officials at the United States Federal Reserve to think more globally.

Mr William C. Dudley, president of the New York Fed, said on Wednesday that a September rate increase looked less likely than it did a few weeks ago.

"The entire world is focusing now on China, watching this crisis unfold," Brazil's Minister of Development, Industry and Trade Armando Monteiro Neto said. "Brazil is already feeling the effects of China's deceleration. If the situation gets worse, the impact will get bigger."

The trouble is, the true strength of the Chinese economy - and the policies the leadership will adopt to address any weaknesses - is becoming more difficult to discern.

The slowdown

China's growth, which the government puts at 7 per cent a year, is widely questioned.

Large parts of the country's service sector, like restaurants and healthcare, continue to grow, supporting the broader economy.

But the signs in industrial sectors, in which other countries and foreign companies have the greatest stake through trade, paint a bleaker picture. Adding to the worries are recent events like the deadly explosion of a hazardous chemicals warehouse in Tianjin, which has delayed shipments through one of China's biggest ports.

Labour protests, already rising, jumped sharply across coastal China last week over unpaid wages at struggling export factories.

The leadership has been quick to act, making aggressive moves to prop up the stock market, inject money into the financial system and stimulate the economy.

But President Xi Jinping doesn't have much experience managing a downturn, and some economists worry that the government is making knee-jerk decisions that will do more harm than good.

Many company executives and global economists say that forecasting China's growth has become so hard that they are hedging their bets for the time being.

"This is a complete black art right now," said Mr Tim Huxley, chief executive of Wah Kwong Maritime Transport Holdings, a large Hong Kong shipping company.

"I can't make any long-term decisions based on what is happening today, so I just keep our fleet running until we get a bit of direction."

Ripple effect

With Brazil's revenues declining sharply this year, President Dilma Rousseff's government is coming under criticism over the country's dependence on China, which surpassed the US as the top trading partner in 2009. Brazil's exports to China fell 23.6 per cent, to US$24.7 billion (S$34.6 billion), in the first seven months of the year from the same period last year.

In an editorial on Tuesday, the O Estado de S. Paulo newspaper described Brazil's relationship with China as "semi-colonial".

China was also supposed to be the financial saviour for Russia.

Last year, Russia signed a US$400 billion natural gas deal with China. China would help finance a roughly 3,990km pipeline to ship fuel from Siberia.

Russia trumpeted that it would eventually sell more natural gas to China than Germany, now its biggest customer.

But the prices that China is willing to pay for the gas are dropping so low that it may no longer be worthwhile to build a pipeline.

"China is an unclear country for us, opaque," said finance professor Aleksandr Abramov of the Higher School of Economics in Moscow.

"We don't know what to expect."

What next

In the end, much of the China story will come down to whether expectations meet reality.

BHP chief executive Andrew Mackenzie conceded that the country's steel production would most likely "grow a little more slowly", citing a forecast that works out to just 1.4 per cent annually.

A similar realisation is taking place in various corners.

"We had five fabulous years in China, of course, where we grew strong double-digit, and it has been gradually slowing down," Mr Frans van Houten, chief executive of Royal Philips, the Dutch conglomerate, said last month.

"I think we need to be much more modest on expectations with regard to China's growth. That's just being realistic."

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on August 29, 2015, with the headline 'World faces new reality where China's no longer a sure winner'. Print Edition | Subscribe