Sometimes, investors just need an excuse to sell. If they feel
like worrying, there are always an ample amount of things to worry
about. A few months ago, Greece was the concern du jour. Even
though it's a tiny economy, and has almost zero trade with the U.S.
outside of tourism and feta cheese. It still became the catalyst
for billions in lost
Now, the world's fastest-growing (and likely eventually largest)
economy, China, is spooking the market down to further lows. The
S&P 500 hovers perilously above 1,000, right where it sat 10
months ago. The concern: an overheated Chinese economy is set to
slow -- sharply. But it's hard to see how China can come in for a
hard landing with so many positive drivers still in place.
Let's look at the facts. Up until now, China has been able to
maintain very strong
growth rates -- around 8% in 2008 when the rest of the world was
seeing an economic contraction, and closer to 10% as the global
economy rebounded. That kind of growth is bound to incite talk of a
bubble. And sure enough, housing prices in major cities like
Beijing, Shanghai and Shenzen have soared. Homeowners in those
areas may soon find they vastly overpaid for their flats. But
crucially, Chinese investors typically must come down with very
large down payments, up to 30% to 50%, so very few will end up
"underwater" and foreclosed upon.
But in many other respects, Chinese policy planners have already
been applying the brakes, steadily reducing the chance of
overheating. Just five years ago, banks would lend to almost any
company that was looking to hop on the export machine. Now, those
banks are being told to cull the herd and stop encouraging too many
For example, nearly 80 Chinese companies sprang up to make
glysophate, the generic equivalent of
Round-up herbicide. But the world was soon awash in the
stuff, and many of the glysophate makers began to operate at a
loss. Now, there are just 15 firms in China making glysophate
(which by the way is good news for Monsanto as well, as lower
output means higher prices).
Equally important, China developed a $586 billion stimulus program
in 2008 to help build out transportation links and other
infrastructure in its economically-underdeveloped interior. Just as
was the case with the building of our interstate system, that
should lead to sustained economic growth in the interior as demand
grows for fast food joints,
stores, professional services like architects, and dozens of other
types of businesses.
The greatest concern for China has centered around labor costs,
which had been among the lowest in the world. And as we saw in
Japan in the 1970's, and then Korea more recently, that's simply
unsustainable. But Japan and Korea smoothly morphed into more
broad-based economies that no longer relied on cheap labor.
There's a good chance that China's GDP falls by half to 5% or even
4%. But in some respects, that's more desirable than 10% GDP
growth. The lower growth rate allows the country's central planners
to more adeptly control the economic policy levers that can
modulate growth to a target level. Chinese planners had previously
been fixated on squeezing out the highest growth rates. Now,
they're fixated on social harmony, which means they simply want to
avoid any wrenching economic moves that would trigger social
With nearly $1 trillion in foreign
reserves, China has ample capacity to stimulate or cool its economy
as it pleases. If it needs to stimulate, then efforts to boost
domestic consumption will be the focus. Gone are the days when
China looked to simply its export its way out of any problems. And
that's a good thing.
Action to Take -->
Shares prices around the world have been slumping, due in part to
fears of a China contraction. Chinese stocks in particular are
trading well off their highs. China's Shanghai Composite Index has
fallen from 3,250 at the start of the year to a recent 2,475. And
as we've noted in these pages, many strong domestic-focused China
plays are getting no love.
Deer Consumer Products (Nasdaq:
Perfect World (Nasdaq:
, and many others in the table below sport single-digit forward
P/Es. Looking at that metric, you'd never think we're talking about
an economy that is poised to soon overtake Japan and Germany and
become the world's second-largest economy.
|China XD Plastics
|China Gerui Materials
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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