Chinese Recession: More Evidence Of A 'Hard Landing'

Includes: CLF, FCX, MOLX, RIO
by: Shaun Connell

The future of China is a huge part of the future of the world, as Chinese demand and supply for the world economy is huge and has grown at unbelievable amounts over the last several decades.

Unless something unbelievably disruptive happens -- like a full-on economic crash -- the future seems inevitable. This will likely be the century of China.

But still, in the last decade, the economic growth has been incoherent -- filled with malinvestment -- and more all-around signs that their government was making huge investment and infrastructure mistakes. Housing bubbles, corruption, empty cities -- all of these have been occurring in China.

Arguments For A Soft Landing

A couple of weeks ago, the IMF praised China's government for helping cultivate a soft landing with huge boosts in spending and monetary manipulation.

The general view is that Keynesian economics is right, and China has been printing money and basically living out a Keynesian fantasy of increasing government spending.

Arguments for a Hard Landing

First, every new projection about China's economy is overly optimistic, whether it's about their GDP, trade stats, or other indicators. In general, when a malinvestment bubble is starting to bust, the consequences are almost always worse than the economists originally thought.

Export growth in China slowed down to just 1%. That's not a good sign at all, considering they're viewed as the world's factory.

Patrick Chovanec has made it clear in the past that he believes China is in for a hard landing, according to MSNBC:

"I think we are in a hard landing because, putting aside some of the official data, if you look at the numbers that are coming out on the micro level, the profit warnings are already higher than the levels that we saw in early 2009," Chovanec said on CNBC Asia's "Squawk Box," referring to the global financial crisis.

"There are certain key industries that we can look to -- steel, construction and equipment manufacturing -- that are clearly in contraction right now," he added. Suning, China's top home appliance retailer, and ZTE, a major maker of telecoms equipment, have both warned that profit for the first half of this year will fall by 30 percent and 80 percent, respectively.

Profits are falling, the economy is deleveraging, demand from the rest of the world isn't great, and the government is reacting in its typical heavy-handed, corrupt manner.

What's Going To Happen?

The chances for a hard landing have drastically increased over the last couple of months, and it's even more important than before not to invest with much exposure to the Chinese economy until it's clear whether this will be a slowdown or a full recession, and even a possible crash.

This doesn't mean this isn't the century of China. Remember, in the 20th Century, the U.S. went through World War 1, World War 2, the Great Depression, the Korean War, Vietnam, stagflation in the 70s, and other economic calamities -- and we still had huge growth during the century.

China will likely have a much larger economy than the U.S. over the next few decades -- but in the next year or so, hell could still be unleashed in the markets.

When it looks like a crash might be occurring, it'll be good to look for investments that could go on sale, like mining stocks. Over time, the need for them will absolutely be back, and huge profits can be made.

A few companies to watch for would be Freeport-McMoRan (NYSE:FCX), Cliffs Natural Resources (NYSE:CLF), Molex (NASDAQ:MOLX) and Rio Tinto (NYSE:RIO), all of which have strong exposure to the Chinese economy, either by mining or manufacturing electronic devices high in demand for the growing economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.