|
Published: July 6, 2010
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
market value.
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
GDP 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 new businesses.
For example, nearly 80 Chinese companies sprang up to make
glysophate, the generic equivalent of Monsanto's (NYSE: MON)
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, Wal-Mart (NYSE: WMT)
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
unrest.
With nearly $1
trillion in foreign
currency
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:
DEER),
Perfect World (Nasdaq:
PWRD), 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.
-- David Sterman
Staff Writer
StreetAuthority |
