In explaining the decision to hold interest rates steady this past week, Federal Reserve Chair Janet Yellen made no secret of the concern she and her policymaking colleagues have about China’s growth.
“The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets,” Yellen said at her Thursday press conference. “Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.”
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Yellen said she and her colleagues are focused on overseas risks that could spill over and affect the U.S. economy. Those same concerns roiled financial markets starting in August, pushing investors to dump their shares.
While Yellen may have good reason to monitor the situation closely, analysts say U.S. investors may be overreacting to developments in Beijing, as U.S. companies have very little direct exposure to China. Only 31 companies in the S&P 500 index generate 10 percent or more of their revenue from the world's second biggest economy, according to an August list compiled by Bank of America Merrill Lynch. All S&P 500 companies, on average, derive just 2 percent of their revenue comes from China, according to Goldman Sachs.
"For China's direct impact on both the U.S. economy and corporations, it's hard to find a strong reason to get real worried," says Bill Stone, chief investment strategist for PNC Bank. U.S. exports to China totaled a mere $165 billion last year, less than 1 percent of GDP.
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As for China's troubles, recent economic data indicate GDP is growing only 3 to 5 percent rather than the 7 percent rate that the government claims, economists say. Weak growth led authorities to devalue the yuan Aug. 11, and it has dropped 2.5 percent against the dollar since then.
The sectors that are heavily exposed to China include technology; industrials, such as machinery and equipment makers; and consumer discretionary. The top companies when it comes to China exposure include gaming powerhouse Wynn Resorts, which earns 70 percent of its revenue in China; chipmaker Qualcomm, which garners 50 percent of its revenue there; and jet manufacturer Boeing at 12 percent. Apple generates 17 percent of its revenue in China, though in recent quarters that figure has risen above 25 percent. Consumer products giant Procter & Gamble gets 7 percent of its sales in China. "There are companies that will be affected," says Peter Chung, an equity strategist for Wells Fargo Securities. The biggest of those, like Apple and Boeing, could have an outsized impact on the S&P 500 index, which is weighted according to the market capitalization of its components.
|Company (Ticker)||Industry||Sales Exposure to China|
|Wynn Resorts (WYNN)||Hotels Restaurants & Leisure||70%|
|Skyworks Solutions (SWKS)||Semiconductors & Semiconductor Equipment||69%|
|YUM! Brands (YUM)||Hotels Restaurants & Leisure||55%|
|QUALCOMM (QCOM)||Communications Equipment||50%|
|Avago Technologies Limited (AVGO)||Semiconductors & Semiconductor Equipment||49%|
|Micron Technology (MU)||Semiconductors & Semiconductor Equipment||41%|
|Broadcom Corporation (BRCM)||Semiconductors & Semiconductor Equipment||31%|
|Mead Johnson Nutrition Company (MJN)||Food Products||31%|
|Altera Corporation (ALTR)||Semiconductors & Semiconductor Equipment||31%|
|Amphenol Corporation (APH)||Electronic Equipment Instruments & Components||27%|
|Microchip Technology (ACHP)||Semiconductors & Semiconductor Equipment||24%|
|Xilinx (XLNX)||Semiconductors & Semiconductor Equipment||24%|
|Western Digital Corporation (WDC)||Technology Hardware Storage & Peripherals||23%|
|Corning (GLW)||Electronic Equipment Instruments & Components||20%|
|Intel Corporation (INTC)||Semiconductors & Semiconductor Equipment||20%|
|NVIDIA Corporation (NVDA)||Semiconductors & Semiconductor Equipment||20%|
|TE Connectivity (TEL)||Electronic Equipment Instruments & Components||18%|
|Applied Materials (AMAT)||Semiconductors & Semiconductor Equipment||18%|
|Apple (AAPL)||Technology Hardware Storage & Peripherals||17%|
|Delphi Automotive (DLPH)||Auto Components||16%|
|Agilent Technologies (A)||Life Sciences Tools & Services||16%|
|Analog Devices (ADI)||Semiconductors & Semiconductor Equipment||16%|
|Emerson Electric (EMR)||Electrical Equipment||13%|
|PerkinElmer (PKI)||Life Sciences Tools & Services||13%|
|Boeing Company (BA)||Aerospace & Defense||12%|
|Waters Corporation (WAT)||Life Sciences Tools & Services||12%|
|BorgWarner (BWA)||Auto Components||11%|
|Joy Global (JOY)||Machinery||10%|
|NIKE (NKE)||Textiles Apparel & Luxury Goods||10%|
|Leggett & Platt (LEG)||Household Durables||10%|
|Source: Bank of America Merrill Lynch|
But in general, U.S. companies are less connected to China than those in much of the rest of the world. For example, the portion of European corporate revenue coming from China is about twice as high as that for U.S. companies, according to HSBC. "The U.S. can be pretty self-contained," Stone says.
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China will have a bigger impact on U.S. companies and stocks indirectly than directly, some analysts say. For example, China's sluggish demand has helped send commodity price indices to 16-year lows. With "U.S. corporate profits very tied to commodity prices," that's a big problem, says Dan Suzuki, senior U.S. equities strategist for Bank of America Merrill Lynch. "There are a lot of commodity producers and suppliers of equipment to those producers in the S&P 500," he notes.
Moreover, the yuan's devaluation could lead to currency declines against the dollar elsewhere in the world, Suzuki says. That would make U.S. exports more expensive in those countries and lessen the dollar value of the revenue earned by U.S. corporations in those countries.
A bigger issue for U.S. stocks than corporate exposure to China is the plunge of Chinese stocks, Chung says. The Shanghai Stock Exchange Composite Index has dropped 40 percent since June 12. "Because China is a large player, investors are concerned with the plunge. It limits the exposure to risk that investors are willing to take," he says. That risk includes holding U.S. stocks.
But China's difficulties won't curb U.S. companies' enthusiasm for expanding their business there, analysts say. "China is shifting from an investment-led economy to a consumer-led economy," says Ben Laidler, global equity strategist at HSBC. "That opens up opportunities for U.S. corporations."