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Why the Chinese economy is stronger than you think

The Shanghai Composite Index has tumbled to its lowest levels in over a year, as China's growth slows, capital outflows increase and the yuan weakens.

Yet while the industrial sector for the second-largest economy in the world may be cooling, signs of optimism for consumer growth has risen.


Fourth-quarter GDP for the second-largest economy in the world grew 6.8%, which capped the weakest quarter of growth since the 2009 recession. But just as the industrial side has slowed, consumption, services and technology have improved. In fact, services accounted for just over half of output last year for the first time -- reflecting China's transition from an export-oriented economy to a more service-oriented one.

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Chinese consumers are increasingly technological and consumption-oriented, while the country's rising middle class -- set to approach about 600 million by 2020 (or twice the size of the current U.S. population) -- hold immense spending power. Overall population size should also be boosted by last year's move to end China's one-child policy.

Alibaba's (BABA) consumer-focused singles day in November brought in $14.3 billion in sales, up 60 percent over last year.

Judging from what U.S. companies are saying about their business in China, the Chinese consumer is still a bright spot that will only get stronger.

Apple

Apple (AAPL) shares fell after the company's first-quarter report Tuesday as revenue rose 1.7% year-over-year to a below-consensus $75.9 billion. It sold 74.8 million iPhones, which was below expectations of 75 million, and guidance for second-quarter revenues of $50 billion to $53 billion came in shy of a $55.6 billion forecast. CEO Tim Cook discussed a challenging global macroeconomic environment with "extreme conditions unlike anything we've experienced."

While Cook discussed some volatility in the near-term -- economic softness in Greater China and Hong Kong earlier this month -- he reiterated his confidence in the region and said the company is investing in growth there: "Beyond the short-term volatility, we remain very confident about the long-term potential of the China market and the large opportunities ahead of us, and we are maintaining our investment plans."

Cook emphasized growth in China, where revenues came in at $16.1 billion, up 14% year-over-year. While macro issues persist in China, Cook has pointed out he doesn't see an impact on iPhone sales there. In other words, there are a lot of people in the still-growing middle class who want an iPhone.

"Last summer, while many companies were experiencing weakness in their China-based results, we were seeing just the opposite with incredible momentum for iPhone, Mac, and the App Store in particular," Cook said. "In the December quarter, despite the turbulent environment, we produced our best results ever in Greater China."

The middle class in China is projected to grow from 50 million people in 2010 to half a billion in 2020, Cook pointed out. "We think this provides us a great opportunity to win over some of those customers into the Apple ecosystem," he said. The company is also continuing to invest in retail stores in the country; it currently has 28 stores in Greater China and is targeting 40 by summer.

It's worth noting that almost half of the iPhones sold in China last quarter were to people buying a first iPhone, which suggests the company has a lot more room to roll out its products there. Meanwhile, Apple Pay will be introduced to the country this year.

"We remain very bullish on China, and don't subscribe to the doom and gloom kind of predictions frankly," Cook said.

Starbucks

China remains Starbucks' (SBUX) largest market outside the U.S. but also one that founder, chairman and CEO Howard Schultz plans to expand in. The company operates 2,000 stores in Mainland China in nearly 100 cities, and is on target to reach its goal of 3,400 stores by 2019. To put this in perspective, Starbucks will be opening 500 stores per year for the next five years -- certainly a bullish signal on that market. "Over time, it's conceivable that China could become our largest market," Schultz said earlier this month at a China Partner Family Forum.

Starbucks posted record first-quarter results last week, emphasizing strength in China, even as analysts initially reacted with disappointment to China/Asia Pacific comparable-store sales that were up 5%, just shy of heightened expectations of 6%.

On the company's conference call, Schultz underscored his faith in continued consumer spending in China. "Short-term market gyrations... should not be confused with actions that will lead to long-term sustainable economic gain, especially as China moves to a consumer-driven economy," he said, adding that "Starbucks is just getting started in that important country."

Schultz also emphasized the strong opportunity in mobile, as "China has leapfrogged from a rotary phone to a regular phone to a cell phone and a smartphone overnight." As the company rolls out mobile pay in that market, Schultz expects adoption to be more rapid than it was in the U.S.

Nike

Chinese consumers, it seems, like their Nike products. Ten percent of Nike's (NKE) total sales in fiscal 2015 were from China.

During the sports apparel behemoth's investor day in October, Nike executive Elliott Hill said that “Nike is the No. 1 favorite brand in China and our business has grown nearly $600 million in revenue or 24% growth over the past two years.” The growth is set to continue: Hill said he sees revenue climbing to $6.5 bilion by end of fiscal year 2020.

Online sales China are especially strong for Nike. In the second quarter last year (reported in December), Nike's direct-to-consumer business in China grew 51%, fueled by its most successful Singles’ Day event ever. "Nike.com is showing extraordinary growth in China in one of the most mobile and connected countries on the planet,” Nike Brand President Trent Edwards said.

The power of Nike-endorsed athletes in China has also been fueling consmption. This past summer, more than 40 million television viewers watched RISE 2.0, where Nike-endorsed athletes -- including Kobe Bryant and LeBron James -- worked with young local athletes.

Ample opportunity remains, as CEO Mark Parker echoed both Cook's and Schultz's optimism in China's growing middle class. So far Nike has only touched about 20% of the market with its re-profiled stores and more consumer-focused outreach efforts -- and Nike.com in China was just launched two years ago, according to CFO Andrew Campion.

“We remain very mindful of the macroeconomic dynamics in China. But China continues to represent a tremendous growth opportunity for Nike," Campion said. “We don’t see consumer resistance or an unwillingness to pay for the premium value we’re providing.”

McDonald's

Investors applauded McDonald's (MCD) fourth-quarter report on Monday for its 5.7% same-store sales jump in the U.S., confirming a continued company turnaround under new CEO Steve Easterbrook -- and helped by its all-day breakfast option. But overlooked was China’s same-store sales growth of 4%.

McDonald's, too, is aiming to build out more in China. Affirming his confidence in the potential, Easterbrook said the burger chain plans to open more than 250 restaurants in China in 2016, the highest of any of its markets.

Easterbrook added that though recent volatility has unnerved investors, he's confident in the market's core business and growth opportunities.

Coach

Coach (COH) shares surged 10% on Tuesday, after reporting a second-quarter beat. The stock has been hit hard in recent years, falling from over $75 a share in March 2012 to under $30 a share after being plagued by competition and fashion misses.

Yet while a U.S. turnaround remains in focus for Coach, China -- which brought in over $600 million in sales for the company in its 2015 fiscal year -- is also important for the handbag seller's success, contributing 15% to overall sales. In its latest quarter, Coach highlighted double-digit increases in mainland China. It also plans to increase its store base in the region. In 2016, the company sees double-digit increases in square footage in China while North America will remain unchanged.

Proctor & Gamble

Nine percent of Proctor & Gamble's (PG) sales come from China and is the company's second-largest market. 

While the consumer goods seller discussed a slowdown in China during its second quarter conference call this week, CFO Jon Moeller said the company expects improvement in the region in the back half of the year. P&G sees "significant opportunity remaining in China with those very attractive growth rates, albeit somewhat slower than they were two and three years ago, with the conversion from a manufacturing to a consumption-based economy, with the dramatic potential that exists as a result of larger family sizes with the possibility of two children versus just one, and with the premiumization of the market," Moeller said.

Facebook

And even Facebook (FB), which isn't available in China, has acknowledged that the country is one of the biggest advertising markets it has. The company, which reports on Wednesday after the close, highlighted this in its third-quarter conference call on Nov. 4. CEO Mark Zuckerberg said: “People think that Facebook isn’t in China at all and that’s actually not true. Our consumer service isn’t active there, but it actually is already one of the biggest advertising markets that we have. Because there are a lot of really big and important Chinese companies who sell a lot of products to people outside of China, and they use Facebook as one of their primary tools in a lot of cases to spread information about what they’re doing and grow their customer base.”

Facebook said it remains committed to entering the region. “Obviously, you can’t have a mission of wanting to connect everyone in the world and leave out the biggest country. So over the long term, that is a situation that we will need to try to figure out a way forward on,” Zuckerberg said on the last conference call.

Wynn and Las Vegas Sands

Much has been made over the last year about the slowdown in gaming at Wynn (WYNN) and Las Vegas Sands (LVS), which, by the way, get the majority of their revenue from Macau and the Chinese consumer. Much of this is due to the government's crackdown on conspicuous consumption and anti-corruption as opposed to a weakening consumer, according to Nomura.

The bottom line: China's economy may be moderating some -- feeding into some macro uncertainty and noise -- but American companies on the ground there are reporting strength for an increasingly consumption- and service-oriented country.