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Beijing struggles with change

| Saturday, Aug. 8, 2015, 9:00 p.m.

When Apple Inc. announced its second quarter earnings, it became clear how important China is to its sales.

As China transitions from a centralized economy, financed heavily by substantial debt, into an entrepreneurial consumer market, economic growth is slowing. Already many investors are concerned as Apple and other major international corporations project falling sales here.

The International Monetary Fund reported the U.S. economy was the world's largest in 2014 with a gross domestic product of $17.4 trillion. China followed with $10.4 trillion, ahead of Japan, Germany and the United Kingdom. The IMF estimates China will remain in second place in 2015 with an $11.2 trillion GDP.

The World Bank calculates that between 2010 and 2014, the U.S. economy grew by an average of 2.2 percent a year, or about a quarter of the pace of China's average annual growth of 8.6 percent. But China's growth rate fell by 18.9 percent, from 10.6 percent in 2010 to 7.4 percent in 2014.

Many foreign companies have expanded into China's vast markets. Apple reported sales to China increased in the second quarter of this year to $13.2 billion, representing 26.7 percent of its worldwide quarterly sales of $49.6 billion.

International auto companies are forecasting reduced sales in China.

Fear of lower corporate earnings has been reflected in investor selling pressures. China's National Bureau of Statistics announced industrial profits for June falling by 0.3 percent. This led the Chinese stock market to experience its worst day in eight years — despite reduced reserve requirements, low interest rates, the prohibition of short sales and direct market intervention by government.

In a modernization program from 1978-1992, Chinese leader Deng Xiaoping turned back many of the economic disasters and famines triggered by Mao Tse-tung. But he achieved industrialization and infrastructure construction with a Communist economy financed with debt.

McKinsey Global Institute reports that from 2007-14, China's total debt, largely corporate and household, rose by 3.8 times or $20.8 trillion, comprising 36.5 percent of the world's $57 trillion estimated increased debt. Huge credit growth tends to cultivate misallocation of resources, risky loans and a drag on growth.

The Cato Institute in 2012 reported that Ronald Coase and Ning Wang, authors of “How China Became Capitalist,” concluded that China has developed a robust market for goods but lacks the free market for ideas typical in a capitalist-driven, enterprise economy. President Xi Jinping, a victim of Mao's Cultural Revolution, undoubtedly is aware of this. But to engender a free economy, the resistance of the entrenched socialist elite who benefited under the old system must be broken.

As China transitions into entrepreneurial capitalism, growth may stall. This will challenge Western economies, companies and stock markets with declining revenues, earnings and employment. Despite rising second-quarter sales, falling demand and price-competitive Chinese products likely already are slicing into Apple's earnings and share price.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

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