China's Stock Market Plunge Raises Questions About Future

Slower Growth Is Likely, and Much Will Depend on Consumer Spending

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China's roller coaster ride on the stock market, with shares down about 30% in less than a month after a rapid rise, is raising serious concerns about growth in the world's second-biggest economy, and whether consumer spending will play a big a role as widely hoped. Ad Age asked China experts for their take on China and its prospects, starting with self-described "unabashed China bull" Martin Sorrell.

Martin Sorrell.
Martin Sorrell. Credit: WPP

"We think it's been apparent for some time that Chinese stock markets have been overvalued—e.g. stories of farmers investing in the stock markets, rather than farming; the pricing of some deals in our industry in China; and the privatization of Chinese U.S. listings with the aim of refloating in China to arbitrage the high Chinese valuations," the WPP chief executive said.

"Our Chinese business continues to grow and is our third largest, forecast to cross $1.6 billion of revenue this year and growing about 4% like-for-like. It is, however, quite volatile and multinational clients are finding it more difficult, locals perhaps less so. We remain unabashed Chinese bulls, and given the opportunity would double-up given the long-term opportunities."

Mr. Sorrell noted that growth—both in the ad industry and worldwide GDP—is coming mainly from the U.S. and China, and that despite slowing down, China is still growing faster than the developed world.

One concern this week has been that the powerful Chinese government's measures to try to control and boost the stock market have been seen as largely ineffectual (although the benchmark Shanghai Composite rose by almost 6% on Thursday, as Chinese stock exchanges posted their biggest daily gain in six years).

Tom Doctoroff
Tom Doctoroff

On the ground in China, Tom Doctoroff, CEO of Asia Pacific for J. Walter Thompson, said, "I'm actually quite concerned … What I think has happened for the first time I have observed is that the Chinese people are questioning the ability of their central leadership to orchestrate significant reform or change. … In a pinch, as was the case in 2009, I do believe the central government has the wherewithal to manage nearly unmanageable balancing acts. For the first time I can recall people are starting to ask the question of why they can't manage this one."

What this means for brands and agencies, he said, is that "people should be approaching China revenue forecasts conservatively. And I think the big question that we need to look at is whether or not the reform agenda continues apace … There has been progress made, but if there is a backtracking then I do believe it is going to be a bad signal for growth rates going forward. I don't think it means people should run for the exits, but we need to manage expectations of potential growth and be conservative overall."

He added that a key indicator will be consumer behavior: "What was keeping everybody very optimistic was that the whole economy was to be rebalanced into consumer spending. Though total growth rates have slowed, consumer spending has not been that dramatically impacted.

"It's very premature to be making any macro decisions based on what's happening right now … The immediate question is whether it impacts consumer confidence. That's the $64,000 question: Will it affect the psychology of the nation and the confidence in the leadership?"

Even before the stock market started to plunge, Western brands in many categories have been facing tougher times in China after becoming accustomed to years of fast growth.

Luxury goods have suffered for almost three years amid a government crackdown on corruption and lavish gifts for government employees. Fast-food brands have struggled to rebound from a food safety scandal at a supplier. (Yum Brands said same-store sales in China, its biggest market, were down 12% in the first quarter of 2015.) In a study released last week, Bain & Co. and Kantar Worldpanel said fast-moving consumer goods sales growth in China slowed from almost 12% year-on-year growth in 2012 to 4.4% in the first quarter of 2015.

Yum Brand's KFC in China
Yum Brand's KFC in China  Credit: Tomohiro Ohsumi/Bloomberg

The car industry has already started to feel an impact from the stock market turmoil: China sales in June fell for the first time in more than two years, dropping 3.2% from June 2014, the China Passenger Car Association said.

In terms of the stock market free-fall, some see this as a needed correction, saying that sky-high share prices in China had become divorced from economic reality. Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management, argued on Twitter that "China's capacity to consume will remain resilient."

Nonetheless, on social media, people were already cracking jokes about cutting down on their spending. As The Guardian pointed out, one widely-shared joke on social media went like this: "Last month during the (stock market) rise, my dog ate what I eat. Last week, I ate what my dog eats. This week … I think I'm going to eat my dog."

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