Why U.S. Investors Shouldn’t Be So Worried About China

Why U.S. Investors Shouldn’t Be So Worried About China


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.”

Related: China vs. Yellen — 3 Scenarios That Will Set the Fate of the Global Economy

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.

Related: 3 Major Lessons From the China Crisis That Wasn’t

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%
Cummins (CMI) Machinery  15%
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.

Related: Why China’s Economy May Be In Better Shape Than We Think

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."