SHANGHAI (Reuters) - China’s business climate is the toughest it’s been for three decades for international firms, Martin Sorrell, head of the world’s largest advertising firm WPP Plc, told Reuters on Thursday.
WPP’s (WPP.L) own revenues in China were flat in the first six months of the year, Sorrell said in an interview at its Shanghai office.
“It’s the first time for a long time we’ve seen it like this,” Sorrell said, adding the company which employs around 15,000 people in China was predicting a boost in the second half of the year. “Having said that, I think it’s pretty tough sledging.”
With China’s economic growth at its slowest in a quarter of a century - just above 6.5 percent - investors and business leaders are seeking any clue about the health of the economy, especially areas fuelled by the consumer spending and services that are meant to take over from flagging manufacturing and exports.
Sorrell said even these areas were showing weakness, although longer-term he remained an “unabashed raging bull”.
“You are getting some positives, it’s not all doom and gloom by any means. It’s the second largest economy in the world... so it’s very significant. But it’s not, in my view, growing at 6.5 percent,” he said, referring to China’s 2016 growth target.
This slowdown has hit multinational firms harder than domestic rivals, which have been able to adapt products faster to take market share from international brands.
Last year, domestic brands ate into the market share of foreign products for the fourth year in a row, according to data from Bain & Company and Kantar Worldpanel. This included goods ranging from fizzy drinks to toilet paper.
Chinese firms are also being increasingly aggressive abroad, creating another challenge for overseas rivals but also fuelling debt risk at home as they take on more leverage to fund their buying spree.
Chinese outbound M&A activity has more than doubled in the past two years, hitting a record $120 billion in total deal value by June, according to Thomson Reuters data, a spree which has raised questions over some firms’ ability to pay.
“Some of these are trophy assets that are being bought at trophy asset prices,” said Sorrell, commenting on a recent spate of acquisitions by Chinese buyers in the global soccer market, which has soaked up around $3 billion (£2.31 billion) since the end of 2015.
“It’s difficult to see how returns will be earned, even over a very long term, because the prices being paid are very high.”
Chinese retailer Suning Commerce Group Co Ltd (002024.SZ), developer Dalian Wanda and other more obscure Chinese groups have led the charge in soccer deals, helping pump even more money into the market.
Sorrell said that influx was partly to blame for greedy behaviour including a bribery scandal at football’s governing body FIFA and the sacking this week of English football team manager Sam Allardyce for seeking a lucrative sideline role while talking to undercover reporters.
“All that money coming into the sport obviously creates some green eyes,” said Sorrell.
Reporting by Adam Jourdan; Editing by Ruth Pitchford