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Friday, October 19, 2012

China's economy slows down – threatening western bottom lines

Nestlé and Nokia among firms to warn of weaker global sales despite Chinese GDP growing by 7.4% in third quarter

Western firms are preparing for slower growth in China after Beijing said it expected growth to stabilise at 7.5% for the next few years.

The world's second biggest economy grew 7.4% in the third quarter compared with a year ago, the seventh consecutive quarter of slower growth, prompting warnings from Nestlé and Nokia that their bottom line was being affected.

The Swiss maker of KitKat chocolate bars and Nescafé coffee said sales growth in Asia, Oceania and Africa, which account for one fifth of its total sales, fell from 11.6% to 9.4%. Nokia, the Finnish mobile phone firm, also blamed slower growth in China for weaker international sales.

China's growth figure was only just below government forecasts, while a recent surge in industrial output, retail sales and business investment has appeared to put its economy on a sounder footing.

Premier Wen Jiabao was quoted as saying that the economic situation in the third quarter was relatively good, and that the government was confident of achieving its goals. But Mark Williams, chief Asia economist at Capital Economics, said upbeat comments from China's leaders were misleading.

Announcing the numbers, the National Bureau of Statistics said a higher than expected rise in September showed growth was on track to stay above target. "We have 7.7% growth in September, which laid a solid foundation for achieving the full-year growth target. So we are confident that we can achieve 7.5% full-year growth or above," said a NBS spokesman, Sheng Laiyun.

Williams said a 9.1% annualised figure for the third quarter failed to tally with other economic data, but nevertheless a 7.4% growth rate based on the last four quarters revealed the economy had stabilised and was stronger than expected.

"There are also some signs that growth may have started to pick-up towards the end of the third quarter. That said, we think the speed of the turnaround implied by the official figures is implausible and, barring significant further policy moves, expect only a tepid turnaround over coming quarters.Our forecasts remain that the economy will expand around 7.6% this year and only 8% in 2013."

Alistair Thornton, senior China economist at IHS Global Insight, said: "Those fearing a hard landing will be able to sleep a little better, but those positioned for a clear recovery might be disappointed. The picture is one of emerging stabilisation, not the return of unbridled optimism."

European stock markets reacted positively, as the prospects of a China-induced recession receded before paring back gains in afternoon trading.

Several analysts said Beijing was keen to moderate growth to prevent the economy from entering a boom and bust cycle. After the financial crisis, China embarked on a stimulus that maintained consumer demand. But the extra cash spilled over into the property sector and triggered an upsurge in prices.

A downturn after the Greek debt debacle was avoided by cuts in interest rates, that many analysts feared would fuel to an even bigger property price bubble. Projections that China has waved goodbye to double-digit growth is expected to cool property prices and prevent any overheating causing panic and a price crash.

Watch sales slow

The Chinese love affair with expensive Swiss watches is over. Sales have gone into reverse for the first time in three years after a phenomenal export drive that turned Hong Kong and mainland China into the biggest market for Swiss timepieces.

A 27% fall in Swiss watch sales in September was driven largely by an economic slowdown that has also hit German cars and imported mobile phones. Global sales fell 10% by volume and 2.7% by value. The new Bond film, Skyfall, which promotes 007's £3,200 Omega wristwatch, may help with the marketing effort, but according to the Swiss Watch Federation, a fall in sales was to be expected.

"The Chinese economy is running at a slower tempo," said a spokesman.

Omega is owned by Swatch, which is the biggest watchmaker in the world. The James Bond name may also help in Europe, where sales are still rising.

"It is unusual and unexpected, but we think in Europe we have profited from sales to tourists," , said the federation spokesman.

Hong Kong accounts for 21% of all Swiss watch sales, compared with the US's with a 10.3% in the US's share, and mainland China's is close behind with 8.5% in mainland China.

According to industry experts most Hong Kong sales are to visiting Chinese who use their visit to the former British colony to stock up on expensively branded goods.

One analyst said the Swiss were in danger of seeing its 19bn swiss franc industry suffer from a prolonged slowdown in China. French luxury goods maker LVMH and Richemont are two major firms that could also suffer.

"Even if Swiss watch exports are very volatile on a monthly basis we can only be negative after this publication with -20% decline in Asia and negative figures in the US," said analysts at Chevreux, part of Credit Agricole.

The Chinese post crisis boom allowed the Swiss watch industry to break all records in 2011. Hong Kong overtook the US to be the largest market for Swiss watch exports in 2008 and is constantly growing.

A report by Fortune Character magazine revealed that the price of imported high-end watches has increased since 2007 with the average price up by 205% since 2007 to $6,812 in 2011.


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