In the Spotlight – The Chinese Economy
Growth of the Chinese economy slowed to 10.3% in the second quarter
China has largely navigated its way through the global economic crisis and multinational drinks firms are increasingly reliant on the country for growth, which is why a sign of weakness in the country’s second fiscal quarter has left investors a little unnerved.
The Chinese economy grew at 10.3% in the second quarter of this year, compared to 11.9% the year before, as Government efforts to cool the housing market and infrastructure investment began to bite.
For investors, the slowdown comes as many are looking to China to sustain a global economy that is still faltering in the US and Europe.
The same is true of many drinks firms, particularly Cognac producers Remy Cointreau and Pernod Ricard, as well as soft drinks giants like The Coca-Cola Co and PepsiCo, who have used momentum in China to offset stagnation in western markets.
In March last year, Coca-Cola announced plans to invest US$2bn in the country over three years, while, in May this year, PepsiCo pledged an investment of $2.5bn in its food and beverage businesses, also over the next three years.
Earlier this year, the World Economic Forum’s Global Risk Report 2010 warned that any loss in China’s growth momentum could adversely affect global capital and commodity markets.
“The Chinese government faces a number of challenges," the report noted. "The need to increase domestic demand to counter the loss in exports and the need to maintain a stable Renminbi [currency] given China’s vast accumulation of foreign reserves.
“The implications of a fall in China’s growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path.”
With Europe facing a fresh banking crisis and unemployment in the US still double what it was in early 2008, it is safe to say that the global economy has not yet reached that resilient path.
China’s Premier, Wen Jiabao, attempted to allay fears this week, putting the second quarter sluggishness down to the Government’s intervention to slow down the country’s rapid expansion to a manageable pace.
“China’s economy in general is in-line with the government macroeconomic regulation and control,” Wen said. “Major efforts will be made to handle the relations among maintaining steady and fast growth, restructuring the economy and managing well the inflation expectations. China will continue to adopt a proactive fiscal policy.”
Gady Epstein, Beijing bureau chief for Forbes magazine, questioned investors’ thoughts on the slowdown.
“We see reports that China's GDP growth slowed to only 10.3% in the second quarter this year. That's far from a catastrophic slowdown; more like a welcome cooling off of a superheated, investment-driven economy,” Epstein said.
Some experts say slower growth will help to promote efforts to restructure China's economy by boosting domestic consumption and reducing reliance on exports and resource-intensive investment.
Qu Hongbin, an economist for HSBC, said the predictions about a hard landing in China were “overplayed”, adding: “This is just a slowdown towards more sustainable growth, not a meltdown.”
Sheng Laiyun, spokesman for China's National Bureau of Statistics, reiterated the Government’s relaxed attitude.
“The slowing will help our economy avoid overheating and assist in the transformation of our economic model,” Laiyun said.
While analysts have focused on the slowdown, China's exports and consumption have remained robust, with the Government also announcing this week that retail sales grew by 18.3% in June compared to the same month last year. Exports, meanwhile, rose by 44% in the month.
That is promising for companies from Europe and the US who are keen to unlock the door to ever more affluent Chinese consumers.
And, it is clear that many drinks firms continue to see huge potential in investing in the country, which accounts for around a sixth of the world's population.
Global giants like Pernod Ricard and Diageo are attempting to get a significant foothold in the market and convince Chinese consumers to upgrade their drinking habits to premium products.
“Premiumisation is not dead," said Sanford C Bernstein analyst Trevor Stirling in a note late last year. "It is alive and well and sipping Cognac in China.”
"At present imported spirits only account for at most 1% of the total market in China," Kathie Wang, communications director at Pernod Ricard China, told CNBC last month. "This provides great opportunities for the further growth of imported spirits in the country where the economy will continue to grow much faster than others and consumers are becoming increasingly sophisticated."
Diageo's chief marketing officer, Andy Fennel, told the channel: “In developing markets we see more people consuming international spirits versus local spirits as they become wealthier. This trend has contributed to about a third of our growth between 2003 and 2009.”
Nomura analyst Ian Shackleton is also bullish on the prospects for international spirits in China. “We see huge upside for international spirits in China," Shackleton said. "We estimate growth will be 2.5 times GDP growth. With growth set to hit 10%, that is 25% revenue growth per annum.”
So is there really anything to worry about?
“Chinese economic news never disappoints in its ability to be conflicting and confounding,” said Forbes' Epstein. “As a general rule, don't believe anybody who says they know for sure, but I'll venture to say it is not time to worry yet.”
Indeed, China is likely to drive global growth for years to come and businesses across the globe are positioning themselves for a surge of thirsty, middle class consumers over the next 20 years.
If anyone can ride out a rough current right now, it would appear to be China.
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