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China Growth Shift Splits KFC, Hydraulics

Rising profits in China for Yum! Brands Inc. (YUM) and slowing sales for electrical-equipment maker Eaton Corp. are signs of a shift in the nation’s economy toward being driven more by consumers.

Yum, the operator of Pizza Hut and KFC restaurants, is counting on rising incomes in the world’s second-largest economy and said one measure of operating profit in China rose 14 percent in the first quarter. Eaton cited the same “fundamental change” in China’s economy toward consumption for weakness in its business there.

The transition may be evident in reports starting tomorrow, which will probably show imports picked up in April and retail sales held pace while exports and fixed-asset investment decelerated, according to Bloomberg News surveys. The shift will help sustain growth, even as policy easing has a bigger impact driving expansion in the short run, said Tim Condon, chief Asia economist at ING Financial Markets.

“The rebalancing is definitely taking place,” said Condon, who is based in Singapore and formerly worked at the World Bank. In addition, recent easing indicates full-year growth will pick up to about 8.5 percent, he said.

In the long run, China will have “more balanced growth as consumption takes a bigger share” while the proportions from investment and national savings shrink, Condon said.

Stocks Slide

The nation’s economic fundamentals are “good” even as domestic and external conditions remain “complex,” Finance Minister Xie Xuren said in an interview with Economic Daily, according to a transcript published on the ministry’s website today.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slipped 1.2 percent as of 11:11 a.m. local time, poised for the biggest drop since March 29, as political tension in Greece raised concerns that Europe’s debt crisis may further slow export growth.

China’s economy expanded 8.1 percent in the first quarter of 2012 from a year earlier in the fifth quarterly deceleration as Premier Wen Jiabao extended a clampdown on the property market and the sluggish global recovery limited the nation’s exports.

Proportion Rising

Consumption including government spending on public services accounted for about 77 percent, or 6.2 percentage points, of GDP growth in the first quarter, while investment contributed 2.7 points and net exports subtracted 0.8 point, according to China’s statistics bureau. That compares with consumption’s 51 percent share of growth for 2011, versus investment’s 54 percent and minus 5.8 percent for exports.

Yum and Eaton gave their respective outlooks in earnings conference calls with investors last month. “Rising incomes are making our brands even more affordable for an increasing number of people,” Yum Chief Executive Officer David Novak said April 19. Long-term economic trends are “working in our favor in China” for the Louisville, Kentucky-based company, he said.

The company said in February it’s opening at least 600 restaurants in China this year out of 1,500 new outlets outside the U.S.

Alexander Cutler, CEO of Cleveland-based Eaton, said April 23 that the hydraulics maker’s China business may fail to recover in the third quarter as previously anticipated. The country is “going through a fundamental change as they’re trying to move themselves to an economy that’s got more balance” toward consumption, Cutler said.

Leadership Change

China’s overseas sales gains may have cooled further to 8.5 percent in April from a year earlier, while import growth probably doubled to 10.9 percent, based on the median estimates of economists surveyed by Bloomberg ahead of a customs bureau report tomorrow. The trade surplus may have narrowed to $9.9 billion from $11.4 billion in April 2011.

The ruling Communist Party may not be satisfied with a growth shift that slows expansion too much as leaders prepare for a once-a-decade power transfer to a younger generation of officials.

“Policy support is still needed to avoid a further growth downturn, and inflation should not be an obstacle for policy easing in the near term,” said Ding Shuang, a Hong Kong-based economist with Citigroup Inc.

Moderating Inflation

That flexibility comes from consumer price gains that were probably below the government’s 4 percent goal for a third month. Inflation may have moderated to 3.4 percent in April, according to a Bloomberg survey. Producer prices may have shown the first back-to-back declines since 2009.

The government has lowered banks’ reserve requirement ratio twice since November to boost liquidity and spur lending. Its pause since the second cut announced Feb. 18 has lasted 81 days, surpassing the 80 between the first two. Interest rates have been unchanged since an increase in July.

A rebound in China’s growth may improve prospects for a global expansion clouded by slowing job gains in the U.S. and waning demand in Europe as governments from Spain to Italy are forced to implement spending cuts to resolve debt turmoil.

A consumer-driven economy may fail to arrive in China in the next few years, according to the International Monetary Fund. The ratio of investment to GDP is likely to remain above 45 percent through 2017, Murtaza Syed, the fund’s resident representative in Beijing, said in a briefing yesterday.

Output Growth

Industrial production growth probably accelerated to 12.2 percent growth in April from a year earlier, while retail sales growth was little changed at 15.1 percent, economists surveyed by Bloomberg said. Fixed-asset investment growth excluding rural households probably slowed to a 20.5 percent in the first four months of this year from 20.9 percent in the first quarter.

The National Bureau of Statistics is scheduled to release figures for inflation, production, retail sales and fixed-asset investment on May 11.

Lenders may have issued 780 billion yuan ($124 billion) of new local-currency loans in April, economists said ahead of a People’s Bank of China report due around the middle of the month. That compares with 1.01 trillion yuan in March and 739.6 billion in April 2011.

“The China expansion has been powered by investment and export growth,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “The rebalancing will require consumption to play a larger role in future growth.”

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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