Apple has finally stemmed its
losses in China. But the success might only be short-lived.

The tech giant’s iPhone sales
in China for the third quarter hit 11 million units, up from 8 million units
sold during the third quarter of 2016, according to researcher Canalys. Better
yet for Apple, it was the first time in six quarters that the company
registered higher year-over-year iPhone sales. It’s also Apple’s best iPhone
sales performance in China in two years.

But there’s a problem.

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According to Canalys, which
analyses the Chinese smartphone market each quarter, Apple’s success in the
third quarter was due only to “pent-up demand of iPhone upgraders.” Looking
ahead to the fourth quarter, Canalys research analyst Mo Jia thinks Apple’s
shipments will again decline.

“Apple is unlikely to sustain
this growth in the fourth quarter,” the analyst said.

China is an exceedingly
important market for Apple that generates the company billions in revenue each
quarter. However, Apple’s China sales across all products, including the
iPhone, have dropped precipitously over the last couple of years. Concerned
that a major market might be turning its back ever so slightly on Apple, investors
have asked for answers.

Apple’s (AAPL, +0.49%)
executive team has continued to say that China is critical to the company’s
future. The team also believes that the recent declines are short-lived and
reflect early success that is now self-correcting. Ultimately, Apple believes
China sales will return to growth.

Looking ahead, Canalys said
that Apple’s upcoming iPhone X is attracting demand, but its high price and low
supply could combine to garner few sales and ultimately won’t help iPhone sales
in the country.

Apple will soon report its
fiscal fourth quarter earnings, which include China sales data.

Fears about China’s economy
are shaking global markets and capital is leaving the country at an
unprecedented pace. Investors are eager for clues about whether slides in
China’s equity market and currency depreciation at the start of this year were
a sign of acute distress in the real economy, or whether policymakers can
engineer a gradual slowdown that avoids financial crisis and social

China’s bond market is now the
third largest in the world – and continues to grow. However, Chinese corporates
still rely on bank loans for the majority of financing. The government is
seeking to develop the bond market and open it up to foreign investors to
diversify China’s funding sources, and move risk away from the banking system.

The inter-bank market accounts for more than 95 per cent of bond trading by
volume. Government bond yields are still higher than developed economies.

The People’s Bank of China
sets the one-year benchmark lending rate, which it has cut six times since
2014. It is now phasing out the use of this benchmark rate, and a proliferation
of other rates has come into use. The availability of money is also influenced
by the mandatory reserves-to-deposit ratio, which the central bank has also
been lowering. Despite this, bank lending trended downwards throughout 2015. At
the same time as loosening its monetary policy, the government has been selling
off its dollar reserves and buying up renminbi, thus shrinking the domestic
money supply. A collapse in inflation has meant nominal GDP growth has slowed
even more sharply than real GDP growth.

Although China still runs a
healthy trade surplus, the surplus of capital outflow over trade inflow has
caused a fall in dollar reserves. The central bank has also sold off dollar
reserves to support the price of the renminbi.

While economic growth is
slowing overall, and manufacturing companies are cutting jobs, demand for
labour has been propped up by the growing services sector. State-owned
enterprises are holding on to employees even in overcapacity sectors,
stabilising the labour market but slowing China’s economic restructuring.

Although wages are increasing, discontent lurks below the surface. The official
unemployment measures do not take into account migrant workers who are forced
to move back to the countryside. Workers might find themselves unable to
collect wages owed by bosses in shrinking sectors; strikes are illegal. The
China Labour Bulletin recorded a doubling of strikes from 2014 to 2015.

In China there isn’t a huge
demand for Apple products, even though they are one of the biggest economies in
the world and have the largest population. The biggest challenge the company
faces in China is actually selling and promoting their products. As China’s
economy isn’t very stable at present, Apple are finding it increasingly harder
to sell their products to them. China is an extremely competitive market and
there are a lot of cheaper alternatives to Apples products available. This is a
very critical market for the survival of Apples business. The high interest
rates and level of inflation in China means their products appear very
expensive and the mass majority of people will not be able to afford their
products. For example, an iPhone in china can cost around 7,988 yuan (£907).

The average person in China earns 28,752 yuan each year. This means that a new
iPhone would cost the average person in China over 25% of their annual income
and many just simply cannot afford it.  


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