Bottom line: Upbeat reports from leading pork producer Smithfield and aircraft giant Boeing (NYSE:BA) show that consumer-focused companies should continue to thrive despite China's slowing economy, while policy-driven state-run firms could suffer more.
A couple of upbeat new reports from aircraft giant Boeing and leading global pork producer Smithfield are providing an interesting contrast to broader forecasts of gloom and doom for China's slowing economy. In the first instance, Boeing has upgraded its 20-year forecast for aircraft demand in China, while the second has Smithfield has saying its exports to China rose 45 percent in the first half of this year.
Each of these stories is slightly different, but both point to a growing divide in the Chinese economy that has big implications for the nation's major industries. On one side of the aisle are companies like Boeing and Smithfield, which make products and services directly tied to consumer demand. Such products and services are part of the so-called "real economy" and are things that the market really wants. These should be able to continue thriving even if China's economy slows.
On the other side of the aisle are companies that produce products and services less based on market demand and more based on the wishes of local government leaders who use such activity to meet their centrally-set economic targets. These products and services include things like steel and real estate in smaller cities, which really aren't needed and face the most serious difficulties over the next few years due to big oversupply.
Among the companies I write about, including Internet, cellphones and providers of retail products and services, most are privately owned and thus make products that the market really wants and needs. Both Boeing and Smithfield fall into that group as the former makes aircraft that are used to meet growing consumer demand for travel. The latter makes one of China's most widely used food products. But companies like new energy car and solar panel makers might feel a bit more pain, since they're a bit more prone to producing based on government directives and less based on market demand.
Aircraft Fleet to Triple
All that said, let's take a quick look at the latest reports starting with Boeing, which has raised its 20-year outlook for demand from China by 5 percent from its previous estimate made just last year (English article). Boeing says it now expects China will need 6,330 aircraft over the next two decades which will be worth an estimated $950 billion. Boeing made its prediction based on its expectation for a tripling of China's aircraft fleet between now and 2034.
One of the big drivers for the new demand is an expected boom in budget airlines. China's first such carrier, Spring Airlines, has done quite well in the market and held a successful IPO last year that looks like a good long-term bet. Several other companies also have recently launched, including 9 Air, and others are in the process of being formed.
Next there's Smithfield, whose CFO is saying the company's exports to China soared 45 percent in the first half of the year, even as growing signs emerged of a broader economic slowdown (English article). This particular story is one of consolidation since Smithfield's gains followed the departure of many smaller pork farmers from the market due to stiff competition that has undercut their ability to operate profitably.
This particular story also is related to Smithfield's purchase two years ago by WH Group, formerly called Shuanghui. That acquisition carried a price tag of $4.7 billion, making it the largest such purchase of a US company by a Chinese buyer. Part of the logic of the deal was for WH Group to use its own local connections to boost the export of Smithfield's higher-quality products to China, which is what's happening now.
At the end of the day, the Boeing and Smithfield stories both bode well for China's broader private sector - especially more mature companies that are profitable and don't depend on big state-run banks for funding. Many of these market-focused companies should continue to thrive despite any economic slowdown, and may even become the recipients of preferential policies from Beijing as their importance to China's economy grows.