China’s soft patch may put sizable dent in tech stocks
SAN FRANCISCO — China's moves to cut interest rates again and reduce the ratio of reserves its banks must hold, are designed to encourage lenders there to flood the country with still more loans.
That stimulus, even if effective, may not buffer big tech companies like Apple, Cisco and Qualcomm from a slowdown in China sales.
The Chinese economy badly needs the stimulus A just-released reading of factory output there fell to a three-year low. Stock market prices and raw materials imports have been dropping. China’s public stock markets have been shredded in a way not seen in the U.S. since 2001.
That’s given retail investors in the world’s most populous country the unfortunate chance to share the same pain suffered by Americans who once invested in unprofitable dotcoms.
China’s bankers are now employing tactics used by their counterparts at the U.S. Federal Reserve in 2008-2009 to prevent an economic meltdown. But economists and bankers can only do so much when excessive investment overheats an economy’s ability to soak it up.
Capitalism can be a real bear sometimes.
The country’s growth is now decelerating, and this week’s move to relax lending rules suggests it will take more to prevent China from becoming the next so-called BRIC country to crash after Brazil.
If third-quarter growth in China comes in significantly below expectations — and many signs point to it — the reverberations will ding revenue growth among U.S. tech companies.
Apple is among the most exposed to China, as iPhone sales there have been driving Apple’s revenue growth and stock price gains. Apple AAPL sharesare now down for the year.
China contributed 27% of Apple's revenue during the quarter ended in June.
Qualcomm QCOM has cut its forecast for growth twice this year, citing China in January.
That same month, Microsoft fell 10% after it reported sales in China and Japan fell from a year earlier.
Cisco Systems CSCO, meanwhile, said last month that sales in Asia were flat in the latest quarter and fell 2% for the fiscal year.
Qualcomm and Cisco are just two of many marquee U.S. tech companies that have tried and failed over the years to generate consistent growth in China’s technology markets.
That includes Facebook and Google, two companies whose services are throttled by China's Internet censors.
In an ironic twist, that means those two Internet advertising giants will be minimally impacted by its slowdown, at least directly.
But I would not be putting new money into tech stocks this early into the news that the economic engine of global growth this past decade is slowing.
That’s a high-risk strategy even for Facebook and Google, which are growing, profitable and dominate their business.
If a bear comes and tech valuations contract, all big-cap stocks will get hit.
Leave that level of risk to the venture capitalists and wait until markets show some sustained rallies to get aggressive again with tech growth stocks.
Follow Paste BN columnist John Shinal on Twitter: @johnshinal.