By Mark Magnier, Lingling Wei and Peter Evans
BEIJING--China's slipping economic momentum is driving the
government to seek new sources of growth and pushing multinationals
and Chinese companies to look for a Plan B to prosper in the
world's second-largest economy.
The slowdown has long been a fact of life in China: For months,
Beijing had been preparing the ground for Tuesday's report of 7.4%
growth in 2014 with a "new normal" mantra. The growth rate was the
slowest in decades.
Foreign and domestic companies alike are adjusting to a less
vibrant economy that has meant sometimes huge drops in sales and
missteps in product mixes that can have drastic consequences.
Unilever PLC is one company that has endured a difficult six
months in China.
The maker of Dove soap and Lipton tea said Tuesday that its
sales in China plunged 20% for a second consecutive quarter.
Unilever said Chinese consumers are becoming less willing to pay
more for branded goods and that it is pushing to expand into
smaller cities as growth slows in the major population centers.
"The quality of sales [in big cities] and the economic slowdown
are making us do these adjustments." said Chief Executive Paul
Polman.
General Motors Co. President Dan Ammann said last week at an
investor conference that the auto maker is now focusing on selling
cars in smaller Chinese cities, targeting the car parts and
accessories market and changing its mix to sell more higher-margin
SUVs and Cadillacs. "This market is maturing rapidly," Mr. Ammann
said.
Others are countering the slump by making painful cuts in staff
and production, which slows further the flow of money and economic
activity.
Zhen Jiangke, 47 years old, who works in Beijing at a
petrochemical company, said his employer is targeting cuts of 10%
in the company workforce, forcing him to tighten his belt.
"I'm buying nothing, since my income is so low," Mr. Zhen said,
adding that conditions are likely to get worse in the petrochemical
industry as production costs rise. "I'm not very optimistic," he
added.
Many economists expect growth to slow further this year, with
Beijing likely to maintain its measured approach to boost growth.
Chinese leaders' priority is to prevent a hard landing without
fueling more bad debt and shift the economy toward services and
consumption.
"We should expect growth numbers starting with a 6 to come
through in 2015--we expect 6.8% growth in 2015, slowing to 6.5% in
2016," said Andrew Colquhoun, head of Asia-Pacific sovereign
coverage at Fitch Ratings, in a research note.
Despite its fears of racking up more debt for wasteful projects,
the government still wants to stimulate what it deems as worthy
sectors and businesses.
For instance, Beijing is trying to route credit to
entrepreneurs, farmers, needed infrastructure, where investments
are likely to lead to higher growth. But that is proving tricky:
Some companies are reluctant to borrow, and bankers shy away from
extending loans to smaller companies they fear won't pay them back,
analysts say.
"A lot of the companies that are heavily indebted are
state-owned enterprises, but unfortunately they are the ones that
have access to credit," said Julian Evans-Pritchard, an economist
with research firm Capital Economics. "So they kind of push out
private firms."
Meanwhile, many companies in problem sectors--such as the
overbuilt real-estate market, which accounts for some 25% of GDP if
steel, cement and related industries are included--still hope
easier borrowing conditions will spur new business.
Jiang Yixiong, manager of online store Fujian FOCH group, which
makes and services plumbing equipment, said business has slowed
over the past six months amid the housing glut.
"I think if the government could ease credit conditions, it
would be a big help to companies like ours," he said.
And Beijing can do only so much even for sectors it views as
crucial, such as agriculture.
China's Finance Ministry is speeding up its plan to give farmers
four billion yuan ($644 million) in subsidies they can use to
purchase equipment, for instance, according to officials with
knowledge of the move, which was originally slated for release
later this year.
"The funds are being frontloaded now to boost spending," one of
the officials said. Still, the Finance Ministry is unlikely to
increase the overall amount of subsidies to farmers this year, the
official said.
In November, China's top-planning agency announced seven
transport, oil pipeline and related infrastructure projects it
wants local governments to carry out during the first quarter.
But many local governments shy away from carrying out Beijing's
directives, fearful of adding to already-high debt and hampered by
new rules to rein in shadow-banking lending. Local government debt
amounted to was 17.9 trillion yuan in mid-2013, up 67% from the end
of 2010, according to the National Audit Office.
Some analysts are skeptical that the projects will break ground
in time. "With no funding in place, all those project approvals are
meaningless," said Peng Junming, a former central-bank official who
runs private investment firm Junfan Investment Co.
Mr. Jiang, the worker at the plumbing company, said it is
perfectly natural that China adapt to the new normal of lower
growth. "It's the law of market economics," he said. "Economies go
up and economies go down."
Kersten Zhang, John Stoll and Ted Mann contributed to this
article.
Write to Mark Magnier at mark.magnier@wsj.com, Lingling Wei at
lingling.wei@wsj.com and Peter Evans at peter.evans@wsj.com
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