There are few large markets that are harder to get a read on than China. While everyone knows that China is not the most transparent country, their is high skepticism within the trading and investing community whenever the Chinese government releases their latest consumer, industrial, or other economic data.
The recent Australian unemployment report was horrible, and suggests that the mining and construction industry in China is still weakening as growth picks up in the U.S. Analysts expected a gain of 10,000 jobs, instead the commodity based economy lost nearly 15,000 jobs. While 15,000 jobs may not sound like a big number in a country the size of China or the U.S., Australia is a country of just 23 million people, and the recent job loss moved the country's unemployment rate to 5.2%. Inquiries for new jobs in major papers doubled from 3% to 7% as well.
Asian stocks have also performed well below analyst expectations. The Chinese market has been hit on several fronts over the past couple months. Facing issues over reverse mergers, IPOs that didn't make proper disclosures, and significant undisclosed regional government debts, Chinese stocks have gone from first to worst on many investors lists in less than a year.
Within this back drop, it was interesting to read what was both the horrible and significantly below expectation unemployment report from Australia, a country that is heavily reliant on China. While Australia is a first world country with a strong budget and stable economy, their economy is still heavily levered to commodity prices, and equally heavily levered to Chinese demand for these bulk and base metals.
Now, the fairly simple read on the Australian report is that China is continuing to slow because of their heavy reliance on the eurozone, and Chinese equities should be avoided. However, while you don't have to be that insightful to look beyond the headlines, I think investors and traders would be well-served to look at all the data together.
To me, looking at the economic data and recent reports coming from companies and while as government, we are seeing a bifurcation in the Chinese economy. Real estate and construction are weak, but demand for Chinese exports is stable and Chinese retail spending remains fairly strong.
The Australian unemployment report really should not have been that much of a surprise. Companies in tied to China in the iron ore and metallurgical coal business like MacArthur Coal (OTC:MACDF) and Walter Energy (WLT) have already been warning about slowing Chinese demand for their product for some time.
Also, Chinese equities and companies heavily levered to the Chinese construction and real estate market have underperformed markets by a fairly wide margin.
Finally, companies like Apple (AAPL), Nike (NKE), and YUM brands all have seen consumer spending trends in China remain strong despite the continued weakness in the country's real estate and construction industry.
The stock performance of companies levered to Chinese consumer spending trends have been strong as well. Let's compare YUM (YUM), the company with the heaviest exposure to the Chinese consumer, to a basket of copper stocks (CU). With roughly 60% of global copper demand coming from China, copper, called the red metal, is by far the commodity most tied to Chinese demand. Yum gets 50% of its revenue overseas, and most of its international revenue from China and India.
So how could the Chinese consumer being doing so well when the Chinese real estate and construction industry is doing so poorly? Here I think we need to take a page out of the U.S.'s economic playbook. Just as real estate demand in the U.S. was in part fuel by artificially low interest rates and significant public involvement by government run entities like Fannie and Freddie, the Chinese real estate and construction market was really more about public spending than private demand.
While China's economy has grown in the high single digits the last couple years, that growth has been heavily concentrated along the seaboard in the country's major cities. With blue collar and rural Chinese families benefit only modestly from the country growth while paying more for goods and services as a result of the inflation, infrastructure and construction in China were as much about much about promoting social stability as they were about any real end market demand.
The result has been a massively overbuilt housing market and a lot off unaffordable homes that many regional governments in China don't want to mark to market because of their huge debts. Sound familiar? Indeed, while China's economic growth is likely to be fairly strong this year, investors or traders or are expecting a quick rebound may be disappointed.
While companies tied to Chinese consumer spending are doing fairly well, and leading internet companies in China like Baidu (BIDU), Sina (SINA), and Sohu (SOHU), appear to be showing strong revenue growth as well, this is only part of the economic story in Asia.
With an overheated real estate industry and food and energy prices on the rise, the Chinese government is not likely to ramp up construction and infrastructure spending anytime soon. While the Chinese economy is unique in some ways, it is still an economy of people, and people in Asia don't like buying overheated real estate any more than their Western counterparts.