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China is a driver, not a drag, for U.S. earnings in first quarter

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[April 23, 2014]  By Lewis Krauskopf

NEW YORK (Reuters)  Economic growth may be slowing in China, and fears of a credit crunch there may be rife, but the world's second-largest economy was a driving force for U.S. company profits in the last quarter.

Some of the biggest names in Corporate America, including Coca-Cola Co <KO.N>, General Motors Co <GM.N>, United Technologies Corp <UTX.N> and McDonald's Corp <MCD.N> all in the past week reported strong results from their China operations. In some cases this helped to offset weakness in the U.S. or Europe.

Yum Brands Inc <YUM.N>, the fast food chain operator which gets more than half of its overall sales in China, on Tuesday reported first-quarter sales at established restaurants in China rose 9 percent, rebounding after an avian flu outbreak and a food safety scare badly hurt sales last year.

"It is still a little surprising how strong China remains, given what you read," United Technologies' Chief Financial Officer Greg Hayes said in an interview in reference to the conglomerate's building systems businesses, which include elevators and climate control equipment.


The initial results this period could soothe concerns on Wall Street that a cooling off of China's booming economy will drag down results of U.S. corporations operating in the region. China's economy expanded 7.4 percent between January and March, its slowest pace in 18 months, and well below the turbo-charged double-digit growth rates that it has often experienced in the past 20 years.

But that growth is still far faster than in the United States, where the economy  which took a heavy blow from a deep winter freeze  is expected to have grown just 1.1 percent in the first quarter, according to the latest Reuters poll of economists.

And lower growth rates in China partly result from a push by Chinese authorities to rebalance the economy so that it is less reliant on export growth and more focused on domestic consumption. That is good for Western companies trying to sell into China.

"The economic growth remains favorable in China," said Tim Ghriskey, chief investment officer with Solaris Asset Management. "While that growth rate has slowed slightly there is still a lot of business being done, especially by larger companies, and U.S. companies are receiving their fair share of that business."

AUTO SALES STRONG

In an illustration of the climate in China, 776 large and small cap Chinese companies are expected by analysts to grow earnings by 14.6 percent over the next 12 months, and revenue by 9.1 percent, according to Thomson Reuters Starmine's smart estimates. That contrasts with 9 percent earnings growth on 4 percent higher revenue for U.S. companies in the S&P 500 over that period.

"If we see these Chinese companies are expecting these fantastic growth rates, there's no reason U.S. companies doing business in China should not expect similar growth rates," said Sri Raman, senior research analyst at Thomson Reuters.

Automaking is one industry benefiting from Chinese demand. GM's first-quarter sales rose 12.6 percent in China  a market that now provides four out of 10 of the company's sales  even as sales in the Americas weakened in the period. GM is due to report its earnings on Thursday.

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Similarly, diversified industrial products maker Illinois Tool Works Inc <ITW.N> on Tuesday reported a 28 percent revenue jump in China for its unit that makes vehicle components.

China has also been a bright spot for a variety of consumer product companies. Kimberly-Clark Corp <KMB.N> reported sales of its diapers rose 30 percent in China in the first quarter. Coke's case volumes sold in China increased 12 percent, boosted by marketing campaigns around the Chinese New Year holiday shopping period.

McDonald's said it planned this year to open about 300 new restaurants in the country, where same-restaurant sales rose 6.6 percent last quarter. In the United States, its sales slipped.

And clothing retailer Gap Inc <GPS.N> last week forecast that its sales in China would triple in the next three years to $1 billion, as it seeks to open roughly 30 of its namesake stores this year after opening 34 in the country in 2013.

In China, "while overall economic growth may be slowing, from a consumption perspective, that's rising internally, so that's not surprising to me," said Oliver Pursche, president of Gary Goldberg Financial Services.

Diversified manufacturer United Technologies' sales rose 14 percent in China for its business providing climate control, security and other systems for commercial buildings. Sales of its Otis elevators division rose 16 percent in China, where orders soared about 25 percent.

To be sure, China has been a sore spot for some companies. IBM Corp's <IBM.N> revenue slumped 20 percent in China in the quarter, the latest in a series of setbacks it has suffered there.


And other U.S. companies with significant business in China, such as Apple Inc <AAPL.O> and Qualcomm Inc <QCOM.O>, have yet to report results this quarter.

(Additional reporting by Phil Wahba, Jilian Mincer and Caroline Valetkevitch in New York, James B. Kelleher in Chicago, and Lisa Baertlein in Los Angeles; edited by Martin Howell)

[ 2014 Thomson Reuters. All rights reserved.]

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