Chinese officials in Shandong Province preparing to take samples of iron ore imported from India.
Credit
Chen Weifeng/European Pressphoto Agency
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.
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,
momentum that would provide a steady source of profit and capital.
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.
Graphic
Why China Is Rattling the World
China’s economy is faltering, prompting concerns that are now shaking global stock markets.
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 industry 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.
China’s
growth, which the government puts at 7 percent a year, is widely
questioned. Large parts of the Chinese service sector, like restaurants
and health care, 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.
The China Factor
Articles in this series explore how China's financial heft and economic clout influence the world.
Part 1
China’s Global Ambitions, With Loans and Strings AttachedJuly 25, 2015
Part 3
Chinese Cash Floods U.S. Real Estate MarketNov. 28
Part 4
China Creates a World Bank of Its Own, for AsiaDec. 4
Part 5
In Nigeria, Chinese Investment Comes With a DownsideDec. 5, 2015
Part 6
China Plans a New Silk Road, but Trade Partners Are WaryDec. 25, 2015
Part 7
A Chinese Company in India, Stumbling Over a CultureDec. 30, 2015
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.
Interactive Graphic
The World According to China
China’s enormous overseas spending has helped it
displace the United States and Europe as the leading financial power in
large parts of the developing world.
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.
China was supposed to be the financial savior for Russia.
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.
To Understand Renminbi, Follow the Bacon
From market to table, pork can explain a lot about what’s going on with China’s turbulent currency markets.
By JONAH M. KESSEL on Publish Date August 14, 2015.
Photo by Adam Dean for The New York Times.
Watch in Times Video »
“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.”
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