China slowdown takes a bite out of Apple, but could it give teeth to Indian markets?

Neha Dave Moneycontrol Research

Highlights:- Shares of Apple had fallen 10 percent on January 3 after the company slashed its sales forecast - Apple losing out to cheaper competitors in China - Chinese slowdown is getting visible and can cause ripples globally - India unlikely to remain unscathed, but fall in commodity prices could benefit

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Shares of Apple, one of the world’s most valuable company by market capitalisation, which fell 10 percent in a single day, grabbed global headlines last week. This was in response to Apple slashing its revenue projection — the first in over a decade — on lower China sales. The reaction to this news was apocalyptic, with the S&P 500 and Nasdaq falling 2.5 percent and 3.4 percent, respectively, on January 3, triggering a sell-off in markets around the world.

Much of the bad news at Apple appeared to stem from idiosyncratic factors, including peaking of smartphone demand. Apple grew a percent in China in 2018, while Huawei and Xiaomi growing 41 percent and 43 percent, respectively. Apple now ranks fifth in the top 10 smartphone selling companies in China (where they were ranked numero uno at one time). It seems local competition and attractive pricing is making it harder for Apple to sell a premium phone.

Why is the market worried about slower mobile phone sales from a single company? "It’s not going to be just Apple," warned Kevin Hassett, Chairman of the White House Council of Economic Advisers. Other companies could face similar problems. The fallout from a Chinese economic slump is already visible in certain sectors like automobiles and will potentially affect all large multinationals that are doing business in Asia’s largest economy, not just US companies. Companies globally are vulnerable to an economic slowdown in China due to the exposure of their manufacturing supply chains to China and also because the latter is a key consumer market for many of them (the likes of Starbucks, Burberry, Ford, etc.)

Threat of a Chinese economic slump bigger than potential US recession China confronts huge economic challenges. It has been gorging on debt for almost a decade, reaching a level where it has started to look unsustainable, prompting talks of an economic 'hard-landing'. With the global environment turning much more hostile, unresolved US-China trade issues is weighing on the slowing Chinese economy. While Chinese authorities are trying to address distortions in its economy, the same would be not achieved without short-term repercussions. The latest contraction of Chinese PMI being a case in point.

The investment world seems to be more perturbed of a US slowdown and is busy predicting the timing of the next recession. The bigger cause of concern, however, is the potential pain that a slowing China can inflict on global growth and markets.

The same has been alluded by Shailesh Jha, a keen observer and writer on global macros. He stated: "Markets may just be looking in the wrong direction when it comes to checking symptoms of the next recession – rather than looking West, they could perhaps pay more attention to the East – China."

To bolster his argument, he explained China’s economic heft with some numbers: "As of 2011, China produced 91 percent of world’s computing equipment, 80 percent of its lighting equipment, 74 percent solar cells, 71 percent mobile phones, 63 percent shoes, 60 percent cement, 48 percent coal and 45 percent ships and shipbuilding equipment as calculated by Schwenza (2013)." Hence, even a slight slowdown in Chinese economy can cause ripples globally and well explains global market reaction to Apple’s low China sales.

Implications for India India is unlikely to emerge unscathed from slowing global growth. Having said that, it remains relatively less vulnerable to a global slowdown as large part of its growth is propelled by domestic consumption. Does this mean India will become the next China? Not really.

India’s economy is one-fifth of China’s and is the roughly the same size as China was a decade ago. Assuming the 2017 trend continues and India grows faster than China in the decade ahead, its rise will not be a simple catch-up story. The manufacturing-paved path to growth, which China has mastered over the last decade, is much more challenging, if not impossible. However, India is operating with such a range of inefficiencies that addressing these over time should naturally open new avenues for the next leg of growth.

Also, changes in the global economy are shifting India’s way. We can expect softer commodity and crude oil prices on account of China slowdown and subdued global growth outlook, which bodes well for the energy importing Indian economy. Apprehensions of the Chinese economy’s hard landing had caused a sharp fall in Brent prices to as low as $30 per barrel in February 2016.

As Martin Wolf explains in his latest article in Financial Times, the future might not belong to China. But will that propel the global investors to shift their focus to India, who have long viewed China as a steady source of profit? Probably yes, but only after national elections is behind us.

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