Apple Confirms Problem With China

appkeApple may have a China problem.

A note to clients after Apple’s third-quarter results, analysts at Cowen downgraded shares of Apple to “Market Perform” from “Outperform.” Their big concern: China.

Earlier this week, China reported better-than-expected gross-domestic-product growth in the second quarter, growing 7% against expectations for a 6.9% expansion. But even this growth rate is China’s slowest in over two decades.

And now Apple’s disappointing quarter may be confirmation that China’s economy is not only slowing, but slowing more dramatically than markets expect.

Here’s Cowen:

While [management] commentary sought to re-assure, iPhone units were light even adjusting for channel inventory. Normally, this would not concern us but evidence of a widespread demand reset from China is mounting (auto [sales], [United Technologies], [Fairchild Semiconductor], [Linear Technology] to name a few from what we watch). (These are, according to Cowen, economic data or US corporate earnings that have disappointed with China cited a key negative impact.)

Everyone worried about an economic slowdown in China and the impact it could have on the US economy should read that again: “… evidence of a widespread demand reset from China is mounting …”

On Tuesday, the defense giant United Technologies cut its full-year sales outlook for, among other reasons, “a slowing China.” And in June, Chinese auto sales declined over the prior year for the first time in over two years.

Decidedly negative signals from the world’s second-largest economy.

In the past few months we’ve seen a huge sell-off in the Chinese stock market, which has been viewed as either a harbinger of assured global economic doom or not a big deal because the Chinese economy isn’t as financialized (meaning the actual economy won’t be greatly affected by big swings in the stock market) as, say, the US economy.