[With deepening economic fears about China , multinational corporations and countries
are having to respond to a new reality as a once sure bet becomes uncertain.]
HONG KONG — The 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 investment spending budget by more than two-thirds.
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 stabilizing, the resulting shock waves
could be lasting, by exposing a new reality that China is no longer a sure bet.
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 face the most pressing
concerns, as they scramble to stem the profit slide from weaker consumption.
Caterpillar cut back factory production, with sales of construction equipment
in China dropping by half in the first
six months of the year.
Smartphone makers, automobile 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
soybeans have jolted all of Latin America . The uncertainty over China could limit the maneuvering
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, as they consider raising
interest rates. William C. Dudley, the 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,”
Armando Monteiro Neto, Brazil ’s minister of development and
foreign trade, told reporters on Tuesday in Brasília. “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.
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. Labor
protests, already rising, jumped sharply across coastal China last week over unpaid wages at
struggling export factories.
The leadership, concerned with maintaining social stability, has
been quick to act, making aggressive moves to prop up the stock market, inject
money into the financial system, and generally 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 Tim Huxley, the 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, and so I just keep our fleet running until we get a
bit of direction.”
The problems have been building for months in areas like
commodities and industrials where just modestly slowing growth in China has been having outsize effects.
For more than a decade, prices surged for iron ore, a main
ingredient in making steel, as new skyscrapers, rail lines and other
infrastructure were built across China . Last year, BHP Billiton shipped enough iron
ore each day to China to fill the Empire
State Building.
Now, the industry is retrenching in the face of China ’s weaker prospects and diving
commodity prices.
Vale, the Brazilian mining giant, is racing to unload assets. In
Australia , Vale and its Japanese
partner, the Sumitomo Corporation, sold a coal mine in July for just $1, after
it had been valued at more than $600 million three years ago. In Argentina , Vale is trying to sell a
potash mine in which it invested more than $2 billion.
The fallout in commodities has been especially painful for
emerging markets that depend on sales of those resources.
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 United States as the top trading partner in
2009. Brazil ’s exports to China fell 23.6 percent, to $24.7
billion, in the first seven months of the year from the same period in 2014.
In an editorial on Tuesday, the
newspaper O Estado de S. Paulo described Brazil ’s relationship with China as “semi-colonial,” claiming
that the country’s economy “depends in excess on Chinese prosperity.”
Ilan Goldfajn, chief economist
at Itaú Unibanco, one of Brazil ’s largest banks, said he was
already forecasting the economy to contract about 2.3 percent this year,
without factoring in the possibility of a hard landing in China . “China is the most important risk
factor for Brazil ,” Mr. Goldfajn said.
Last year, Russia signed a $400 billion natural
gas deal with China . China would help finance a nearly
2,500-mile 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.
The Russian energy giant Gazprom has cut its planned capital outlays this year
for the first leg of the pipeline by half, Dozhd television reported.
“China is an unclear country for us,
opaque,” said Aleksandr Abramov, a professor of finance at the Higher School of
Economics in Moscow . “We don’t know what to expect,” he said, adding,
“Clearly, the situation will worsen in Russia .”
Some of the latest pressures reflect a belated recognition by
businesses and politicians that China had been slowing down.
Automobile
manufacturers cut their shipments of new cars to dealers by 7 percent in July, compared
with a year earlier. Retail sales had not suddenly tanked, said Cui Dongshu, the
secretary-general of China ’s Passenger Car Association, which
represents manufacturers.
Rather,
too many cars had been sent to dealers’ lots in previous months, he said. In
other words, manufacturers were slow to see the economy’s deceleration and
waited too long to throttle back their factories.
“What
manufacturers are doing is adjusting inventory levels to the ‘new normal,’ ”
said Bill Russo, a former chief executive of Chrysler China , using a favorite phrase of President Xi
Jinping of China in recent months to describe an economy that
is expanding at a slower pace.
Similar
adjustments are taking place around the globe.
For years, Germany has been well positioned to
profit from Chinese growth because it specializes in machine tools and other
factory equipment. Most important, China acted as a counterweight to
the chronically slow-growing markets in Europe .
Now, major German exporters are seeing signs of pressure.
Trumpf says that sales of its signature product, machines that
automakers use to cut sheet metal that sell for about 500,000 euros ($566,000)
each, have continued to grow in China . But in May and June, sales of
less-expensive cutting machines flattened and began to decline. At the bottom
of Trumpf’s product line, sales have fallen sharply since November for machines
often purchased by start-up companies.
How industries and economies ultimately fare will depend on how
long the slowdown and how deep the economic woes.
Demand remains strong at Boeing for its 777-300ER and 787 jets,
models that are capable of flights lasting 10 hours or longer, to Europe or North America . Long-haul international
travel from mainland China soared nearly 30 percent in
the first half of this year compared with the same period last year, Randy
Tinseth, the vice president for marketing at Boeing’s commercial aircraft
division, said during a visit to Beijing on Tuesday.
So far, it has been mixed for
technology players. Timothy D. Cook, the Apple chief executive, said on Monday
that business had stayed strong in China in July and August. But Meg
Whitman, the chief executive of Hewlett-Packard, said in an earnings call last
week that China’s consumer market for printers and computers was “pretty soft,”
although demand from businesses was holding up better.
In the end, much of the China story will come down to
whether the expectations meet the reality. Andrew Mackenzie, the chief
executive of BHP , captured a broader corporate view on Tuesday when he spoke
glowingly about China ’s potential in the decade to
come and predicted continued profitability. But he 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 percent annually — a figure that sounds
more like Europe than the formerly go-go economy of China.
A similar realization 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,” Frans van Houten,
chief executive of Royal Philips, the Dutch conglomerate, said on July 27. “I
think, going forward, we need to be much more modest on expectations with
regard to China growth: That’s just being
realistic.”
Reporting was contributed by Simon Romero from Brasília, Brazil;
Jack Ewing from Athens; Andrew E. Kramer from Moscow; Paul Mozur from Hong Kong;
and Vinod Sreeharsha from São Paulo.