On October 8th, the World Bank's International Money Fund announced that it downgraded its forecast for China's growth to 7.7% from their May estimate of 8.2%, citing a significant slowdown in the country's economic momentum. While this would be China's slowest growth rate since 1999, it is still more than double the IMF's forecast of 3.3% growth for the worldwide economy; and more than three times the 2.1% expectation for the US going forward.
So, yes, there is a slowdown, but surely it wasn't realistic to believe that China's double digit growth rates were sustainable in perpetuity. I would propose that a PRC determined to implement the policies and programs necessary to ensure continuous, sustainable growth will result in favorable and more predictable opportunities for investors.
Although compounded by a decrease in exports resulting from the weak economic conditions of two of its biggest "customers", the United States and the Eurozone, China's current economic state is largely a byproduct of its own policies and actions. Over the past few decades the world has watched as China implemented a shift from its communist based economy toward capitalism. Using government influence and subsidies to artificially suppress currency and wage rates facilitated success for state-owned businesses and the well-connected and China was able to build an infrastructure that enabled it to provide manufacturing and other services to the world at rates well below free market levels.
Certainly the therapy worked; more than 600 million Chinese rose out of poverty between 1981 and 2004, but as with many tonics, there were some undesired if not expected side effects. Despite the efforts to control the infiltration of western ideas and values, China's population was eventually exposed to capitalism's evil twin, consumerism, resulting in all the trappings that go with it; greed, inflation, and ultimately recession - aka, the American Dream.
In an effort to mitigate looming recession in 2009, China instituted a 4 billion RMB stimulus, strongly encouraging lending through state-owned banks. Like the subprime mortgage fiasco in the U.S., the initial effect was positive, however that was tempered by a rise in bad debt and an estimated 20 million lost jobs, and China's economic woes were further exasperated by the troubled economies around the world.
One could surely argue that China's fiscal and monetary policies provide it with an unfair economic advantage, enabling it to stem the tides of the global crisis and maintain the facade of expansion longer than was possible in the U.S. and most other economies. That being said, I would contend that the result of those policies were also partially responsible for helping stay the sputtering economies of the U.S. and Europe stay afloat rather than fall into a fiscal abyss.
Similar to the U.S., the PRC is faced with the challenge of propelling a stalled economy into the fourth quarter under the political constraints of a change in power. China's President Elect, Xi Jinping, is due to take power November 8th, just two days after the U.S. presidential elections. Hesitant to implement any enduring programs that would hamper the new administration, China recently announced two smaller stimulus programs reflecting a commitment to managing growth without repeating the mistakes of the past - their own or those of the U.S. These programs largely comprise regional spending on "shovel-ready" infrastructure projects; China's National Development and Reform Commission announced approvals for projects that analysts estimate total more than 1 trillion RMB (approximately US $160 billion). Clearly the markets were happy with the news, rallying on the hopes that the stimulus would provide a much needed boost to the economy in the fourth quarter.
I would encourage investors to take a look at Chinese-based companies that participate in domestic growth, particularly those that would benefit from stated government objectives of replacing export driven revenue with domestic demand. Economists estimate China's per capita GDP at $5,530 in 2011, still substantially lower than in the U.S., where estimates range to approximately $49,000, leaving substantial room for growth.
As China's middle class expands, so does the demand for goods and services. The following sectors and companies provide investors with the opportunity to participate in that growth under the auspices and the transparency of the U.S. markets.
Travel and Leisure - Restrictions on tourism within and outside of the PRC continue to loosen, and the Chinese are taking the opportunity to travel. Ctrip.com International, Ltd., (CTRP) is provider of travel services, including hotel accommodations, airline tickets, and packaged tours in the PRC.
Telecom - China is wired, and the world's largest smartphone customers are heating up the 3G and 4G networks. Companies like China Unicom Hong Kong Ltd, (CHU), who was just approved to offer the iPhone 5 in China by the end of the year are well positioned to take advantage of the growth in this sector.
Steel - much of the recent slowdown in construction reflects the luxury market, demand for low and mid income housing is strong. General Steel Holdings, Inc. (GSI) is a leading non-state-owned producer of steel products and aggregator of domestic steel companies in China.
China's economy may be slowing relative to its recent history, however the IMF's projection for 7.7% growth over last year still makes it one of the best games in town. This is particularly true for companies with a domestic focus who stand to benefit from the government's efforts to further develop China's infrastructure and consumer markets.
Investing in companies in emerging markets, including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.
The companies mentioned are listed on the Nasdaq and the NYSE, but their operations are based in China. They are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CTRP over the next 72 hours.