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Apple Throws China Under The Bus, And Opens A Pandora's Box

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Apple is selling fewer iPhones and making less money. Blame China.

“Apple CEO Tim Cook threw China under the proverbial bus,” says Brendan Ahern, CIO of KraneShares in New York. “There is little evidence that China’s economic slowdown is the primary cause of Apple’s woes,” he says, adding that Cook listed other factors for weaker sales, including a strong dollar and lackluster iWatch sales. “The reality is Apple’s phones are expensive relative to local brands, and when combined with a lack of significant upgrades, iPhones are simply not resonating with Chinese consumers,” he says.

Newcomers Huawei and Xiaomi are gaining market share. Third-quarter and year-to-date smartphone sales data from IDC show Apple has been in decline for years, losing to Samsung and local competitors. Here in the U.S., the only real competitor is Samsung. Plus phone carriers like Verizon have protected Apple by offering sweet deals to lure in customers. Apple’s problems are not just because of China. Apple’s fourth quarter will show declines in the U.S. as well, likely leading to a ramp-up of their share-buyback program.

But Tim Cook’s China comments opened a Pandora’s box for China investors and has put the trade war back in focus. Many analysts believe that the tariffs imposed on over $250 billion worth of Chinese imports will start cutting into corporate profit margins in the first quarter. Some companies have already talked about this in third-quarter earnings calls.

With tax cut stimulus wearing thin, capital costs rising and import costs going up, China is one of the biggest headwinds to the U.S. stock market.

China is also slowing on account of economic reforms and the trade dispute with Washington. A weaker China is no longer a theory concocted by the China haters.

Baidu CEO and billionaire Robin Li said “winter is coming” to the Chinese economy. The slowdown has led to hiring freezes and job cuts in the tech industry and work furloughs among state workers ahead of the Chinese New Year. Li commented on the slowdown in a letter to investors. He tried putting a positive spin on it, focusing on the long term. However, Li’s comments plus Cook’s comments on Apple sales equals a deteriorating China outlook.

China’s economy is massive. Its stock market is not a good indicator of economic strength. The Shanghai and Shenzhen stock indexes are in bear territory, down over 30% in the last 12 months. Still, the Chinese economy is not heading for a recession.

Industrial production growth fell to 5.4% annualized in November from 5.9% in October. Nomura Securities analysts in Hong Kong led by Ting Lu said Thursday that they expect it to hold steady in December due to the positive effects of front-loading exports and the less aggressive anti-pollution push. Nomura cut their fourth-quarter GDP growth forecast today to 6.4% from 6.5%. Even discounting those numbers by 50% still has China growing, though clearly not enough for a developing economy of that size.

Retail sales growth is likely to have fallen a bit in December from the 8.1% mark in November. On trade, export and import growth might have picked up due to the trade truce as China buys more U.S. commodities.

© 2018 Bloomberg Finance LP

See: China Manufacturing Output Turns Negative — Forbes

China’s non-manufacturing PMI is still solid, hitting 53.8 in December from November’s 53.4.

The country is busy playing defense against Trump’s trade war and the cyclical slowdown. The central bank is allowing state banks to lower their reserve requirements to speed up lending to midsize and smaller businesses.

Meanwhile, the South China Morning Post is full of headlines this week warning of pending disaster between Beijing and Washington, despite the 90-day trade truce initiated by Xi Jinping at the G20 Summit in Argentina in November.

According to a Bloomberg report quoting two people familiar with the matter, a U.S. government delegation led by deputy U.S. Trade Representative Jeffrey Gerrish will travel to Beijing on January 7 for face-to-face trade talks. The market will be hoping for some good news to come out of those meetings.

The trade war may be part of Apple’s problems. But for Washington, and for many China experts, the first shots of that trade war were started in Beijing over 17 years ago. Changing those rules, rules that made China the world's cheap and weekly regulated manufacturing hub, is a major disruption.

“China has adopted an alternative path that simply seeks to treat its market in the way in which it wants regardless of the rules or commitments made and therefore impinges on the rights of China’s trading partners regardless of the rights that they have,” said Charlene Barshefsky in the South China Morning Post. Barshefsky was part of the Clinton Administration's team that brought China into the World Trade Organization in 2001. “This is a very disturbing outcome not in China’s interests, as we see China’s economy was slowing before all of this trade stuff happened.”

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