iPhone 5: A boost for China

13th September 2012

Michael Feroli, chief US economist at JP Morgan, put out a note asking 'Can one little phone impact GDP?'. In it he predicts that Apple will sell at least 8m of the iPhone 5 by the end of the year, each at around $600: "He argued that around $200 of that figure will account for imported parts, but that the remaining $400 will count towards the US Government's GDP figure, creating a $3.2bn (£2bn) boost for the economy."

This '$200 of imported parts' has been largely ignored by the media. Why? Surely this would bring a commensurate boost to the Chinese economy? There are some superficial reasons: Foxconn, which manufactures the parts for the iPhone, has indulged in a few unsavoury labour practices, as detailed by this piece in the Guardian Although both Foxconn and Apple have promised to address these issues and it might seem inappropriate to gloat about how much money it is making from the iPhone 5 until it has taken remedial action.

However, there is also a sense that this particular success story does not suit the current narrative on China. China has gone from being everyone's favourite growth story to an investment pariah within 18 months. This selection of news stories show the extent of bearish sentiment towards the region:

From the Telegraph: "China's imports shrank in August in a new sign its painful economic downturn might be worsening while export growth was weak due to anaemic global demand."

Whilst CNN suggests: "China's downturn is spreading to the sectors and companies that were expected to withstand the slowdown and drive growth in the region."

Alphaville even believes that the Chinese government is trying to 'cook' lending data to disguise current economic weakness :  "Like us and a few of the pundits, Williams and Wang wonder if the PBoC's decision to delay the release of the lending data breakdown was a ploy to focus attention on the more impressive total social financing (TSF) measure, and away from the details of loan growth and the somewhat disappointing M2 figure." 

China bears such as Societe Generale's Albert Edwards have received much coverage in recent months  Speaking in French paper Les Echos, he says: "All elements of a global recession are in place. China may suffer a sharp slowdown, while the Chinese authorities, who see the first signs of deflation, will also lose control over growth. More and more statistics will worry investors in the coming weeks. China's GDP may slow to 3% or less."

This has been substantially reflected in market performance. The IMA China/Greater China sector is one of the worst-performing year to date, with only Japan and index-linked bonds giving lower returns.

This FT report from the World Economic Forum in the eastern Chinese city of Tianjin highlights the bearish sentiment towards China among analysts, a sentiment that is not echoed by business people: "In quiet conversations and background chats with Chinese officials and analysts about the state of things in China, the tone of despondency and cynicism was pervasive while the views of international attendees on China were generally bullish and upbeat.

"At one point, during a televised panel discussion, Sir Martin Sorrell, chief executive of WPP, seemed to shrug off the idea that the economy was slowing. His company, he said, saw its business in China grow 15.5 per cent in the first seven months of this year."

Although China is undoubtedly slowing, there is at least an argument that this was partly engineered by the Government. James Weir, Asia investment specialist at Guinness Asset Manager, points out that much of the current slowdown in growth is as a direct result of monetary tightening, which in turn was designed to stop poor lending practices and misallocation of capital in the region. He says: "Policymakers were behind the curve for 18-24 months, continuing to tighten policy when it was clear growth was slowing….they tightened for a couple of quarters too long. They are now struggling to get back on the front foot for growth."

This suggests a cyclical slowdown, compounded by a small policy error. It does not suggest that Chinese growth is about to fall off a cliff, but the narrative on China has tended to polarise into the very good or very bad news and at the moment, the momentum is with the very bad news.

China has its problems, but the current focus on its weaknesses is in danger of obscuring the wealth being generated in the country. Manufacturing the iPhone 5 may only be a small part of the overall economic picture for China, but if it can be celebrated as a potential economic boost for the US, surely the same should be happening for China?


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