A U.S.-style financial crisis brewing in China threatens to cut both private and public spending there, potentially tanking an economy that many American corporations dearly need to be healthy now. Without the grand economic growth China has provided in recent years, expect some version of the warning “lower due to a slowdown in China” to show up prominently in U.S. earnings reports this year. There are many likely sufferers.
Rumblings about an economic slowdown in Chinese have been heard for months, fueled by signs of a nascent credit crunch as well as a real estate boom that’s led to a massive amount of empty space. The warnings have taken on more authority in recent days as investors watched a drop in China’s stock market help bring down U.S. stocks.
For a fuller exploration of China’s looming economic problems, see Jonathan Laing’s excellent article in Barron’s.
Plenty of U.S. companies could miss growth targets if Chinese consumers cut back on their spending – an inevitability if an economic crises fully presents. The core component of Yum Brands YUM -1.46%’ (YUM) growth plan is building more KFC’s and Pizza Hut fast food joints in China, where it already operates some 4,200 restaurants. Apple AAPL -1.76% (AAPL), which got 15% of its sales from China last year, is planning on expanding its bigger market share there with a phone that costs more than those of competitors. Starbucks SBUX -1.96% (SBUX) is on course to have 1,000 stores in Mainland China. The Macau (China) operations for Wynn Resorts WYNN -1.28% (WYNN) contributed 72% of the casino company’s total net revenue last quarter. General Motors GM -0.41% (GM) sells more vehicles in China than any other automaker, and investing in its joint ventures there is a key part of its growth strategy.
You can use the YCharts Stock Screener to, say, track all the China-sensitive stocks mentioned in this article, or another list of stocks, and analyze their vulnerability in more depth. Worried that higher-PE ratio stocks would fall harder?
In recent years, China propped up sales for those companies — oftentimes with double-digit annual gains – while U.S. and European consumers were stingier with their money. Share prices rose at least in part on expectations of a quickly expanding middle class in China that would have pocket change to spend on their non-essential products. If the Chinese growth fades now, while it’s still hard to drum up revenues elsewhere, revenue growth may not look this good later.
A slowdown in government and industry spending there also would hit a rash of U.S. earnings. General Electric (GE), for example, has been a major contractor in the power infrastructure projects China’s government has pushed in recent years. Revenues from China rose 20% in 2012. Its 10-K notes only Australia as a region with a higher growth rate. (GE doesn’t provide a thorough breakdown by country. It says about 57% of its revenues, excluding finance operations, came from international operations.) Overall, GE revenues excluding finance (a division it purposely shrank) grew barely 5% last year. Long before China worries, its share price performance was already somewhat constrained by worries about growth. A slowdown in China certainly won’t help it.
Much of the China news from Caterpillar (CAT) has involved a problematic mining equipment company acquisition there that led to the company taking a $580 million write down in January. But an economic crisis in China would create a far more pervasive problem for Caterpillar, and any company involved with mining. Gold prices, oil prices and coal prices often fall when the Chinese economy shows signs of weakness, and that makes Cat’s chances of selling mining equipment anywhere go down. Cat shareholders felt the brunt of that relationship last year when worries about China’s economy started to grow.
Microsoft (MSFT) is right now hiring thousands of employees in China following its launch there of Windows Azure, a cloud computing product that thrives in an environment with a lot of thriving young companies and business generally healthy enough to spend on tech. U.S. companies Stryker (SYK) and Medtronic (MDT) each made major acquisitions recently to get into the medical devices market in China. Their success depends on continued growth of a middle class that can afford better medical services. Investors in Cirrus Logic (CRUS), like many Apple parts suppliers, are going to be disappointed if those budding middle classers in China don’t grow into great consumers after all.
U.S. shareholders have clearly benefitted from China’s growth, which helped pretty-up revenue numbers for a wide variety of businesses when the rest of the world wasn’t much help. There’s still not a lot of growth in the rest of the world. Any reduction in China’s growth now is going to hurt.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com. You can also request a demonstration of YCharts Platinum.