An increasing number of North American companies with significant revenues from China are reporting drastic declines in demand which contradict recent signs of an economic recovery in the country.
Yum Brands Inc., owners of the Kentucky Fried Chicken and Taco Bell brands among others, warned Friday of a decline in Chinese demand that Raymond James analyst Bryan Elliott called "shocking." Management projected a 4-per-cent decline in same-store sales for the fourth quarter – a dramatic decline from 21-per-cent growth for the same quarter in 2011.
Earlier in the week another company with significant revenue from the region, Tiffany & Co., reduced earnings forecasts for the third time this year, citing "softness in China" among the main causes.
West Fraser Timber is among the Canadian companies directly affected by the trend. West Fraser's results in China remain healthy, but Chinese sales fell by $3-million to 15.8 per cent of total revenue in the most recent quarter, compared with 17.7 per cent in September, 2011.
The extent of the slide in Chinese spending creates a disturbing counterpoint to recent indications that the Chinese economy is recovering. Investors can hope that a lag effect will see Chinese demand rise to reflect the more optimistic industrial production results. But the current news flow from North American companies operating in China is disheartening and investors should await more concrete signs of improvement before aggressively committing to China's economic resurgence.
Scott Barlow