China's Economy Is Surging 7% but Everyone Thinks That's Too Slow

Most countries would be thrilled to have such a robust economy. And if the U.S. economy were expanding at anywhere near that level -- its GDP grew just 2.4% last year -- the Federal Reserve would already be raising interest rates.

But in China, which has the world's second-biggest economy after that of the U.S., a 7% growth rate during the first quarter is cause for worry. Until 2011, the economy had been expanding at an annual rate of 9% to 10%.

The problem is that many foreign companies have been spoiled by China's supersized growth rate. So even a 7% expansion could erode business for multinationals that ship commodities, expect high returns from low-cost factories or sell expensive stuff to cautious Chinese consumers.

"In life, it's not the absolute speed you are traveling that matters, but the acceleration or deceleration," said Chester Liaw, economist at Forecast Pte in Singapore. "In particular, industries which used to compete on low costs and mass production should suffer."

The "big losers" are companies leveraged to operate amid faster growth, namely commodity exporters and the construction sector, said Tim Condon, who heads Asia research at ING Financial Markets in Singapore.

Commodities producers such as Nasdaq-listed mining giant BHP Billiton (BHP) and Peabody Energy (BTU - Get Report) may take fewer orders as the Chinese government tries to re-engineer its economy by discouraging new investment in construction and manufacturing.

Despite having made a pivot this year back to infrastructure and foreign investment, Beijing aims for the long term to rely more on consumption and nonfactory investment by domestic firms. Imports declined "sharply" in the first quarter, Xinhua said, as tracked by the drop in energy consumption per unit of GDP.

Buyers of imported raw materials will struggle to make money as wages rise in China, low-skilled workers are harder to find and law enforcement stiffens. Labor-law violators and polluters are easy targets now if they do not contribute to economic restructuring.

Apple (AAPL - Get Report) contractor Hon Hai Precision (HNHPF), for example, is branching into other countries such as Vietnam and mulling use of robots in China as wages rise and its massive factories have come under fire since 2010 over labor disputes.

In another unwelcome move for foreign-owned factories, the government said last year it would let the free market rather than state-ordered caps determine prices of utilities, gas, oil and transport.

Keen to make foreign investors contribute more to a changing China, authorities have used legal means against multinationals such as pharmaceutical giant GlaxoSmithKline (GSK), a subsidiary of which was convicted of bribery last year and fined $490 million.

The economic slowdown has also refocused attention on consumer spending, which the government is pushing as an eventual leader of GDP growth under what it describes as the "new normal" of about 7%.

China's more well-heeled populace (some 280 million people) eagerly participates in e-commerce backed by giant platforms such as Alibaba (BABA) and fast-food brands such as McDonald's (MCD) to get ordinary stuff at affordable prices with the added perk of convenience.

The service sector grew to 51.6% of the GDP in the first quarter from 48.2% last year, Xinhua reported. But consumption has grown slowly and stubbornly as people still invest in property or save for children's education, health-care crises or everyday use should China slips into a period of instability.

The slowing economy also threatens to raise unemployment from about 4% now, some economists say, and that would then reduce disposable income. Such dynamics have hit more expensive items, particularly luxury goods that face additional pressure from China's anti-corruption campaign.

Burberry (BBRYF), to name just one high-end company, might be best preparing for an off year in China. Once economic growth settles to somewhere between 5% and 7% a year and consumers sense stability, careful vendors stand to make money.

That's the cue for the likes of Nasdaq-listed Chinese travel agency Ctrip.com (CTRP), a popular name in major cities where travel is a top nonessential source of spending.

"A more manageable, stable growth rate and a shift towards consumption and services means that [multinational companies] in hospitality, [food and beverages] and so on will continue to reap the benefits of a wealthier Chinese customer and a more stable economy," said Matthieu David-Experton, chief executive officer of market research firm Daxue Research in Beijing and Shanghai.

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