A Mixed Set Of Economic Reports For Investors In China

Includes: FXI, GM
by: Jeremy Johnson, CFA

China released a spate of important economic indicators on Monday that Chinese equity investors should focus on. The first of these reports was on retail sales of consumer goods for March. The year-over-year change in the overall index came in at 15.2%, with strength in food categories, garments, medicine and petroleum products, among the larger categories. Weakness was apparent in household appliances and AV equipment and auto sales, most notably. The overall rate was an improvement from January and February but remains off from the prior year when most monthly readings were above 17%.

Weakness in automobiles is probably most concerning because this segment is a large part of the total. Compared to January and February, this metric continued to decline. This development could also prove interesting for General Motors (GM) since it has such a large business in China. High petroleum prices are likely having some impact on consumer's desire for automobiles or may be constricting ticket size due to the need to pay higher gas bills. In terms of volume, the China Association of Automobile Manufacturers reported on April 11th that passenger car sales were 1.25% lower in the first three months of 2012 in comparison to the prior year, showing that automobile prices are still rising.

The second piece of important data came in the form of the report on investment in fixed assets. The value of investment in January through March grew 20.9% compared with the prior year period with manufacturing industries surpassing this level by about 4%. Weakness accrued in smaller categories such as transportation infrastructure and public facilities. Since a large portion of this investment is government directed it could be showing the desire for the government to slow the economy. Although the overall performance was strong in absolute terms, the level has decreased from the prevailing rate of over 25% achieved in the last year.

The last report issued was on investment in real estate, a hot topic for most China watchers. The overall growth rate of investment came in at 23.5%. The interesting information contained in the report is that newly started construction was quite weak, especially in residential which came in at minus 5.2%. More importantly perhaps, sales of commercial buildings (which includes residential), were down 14.6% while the amount of floor space available for sale was up 35.5%. This data suggests that some troubles are developing in the real estate sector with newly completed buildings not finding buyers at a rate required to keep inventory down. Finally, while 23.5% overall growth in investment seems quite high, the figure is down from about 35% a year before.

Taken as a whole, the data confirm continued slowness in the Chinese economy, although growth remains relatively strong. Retail sales strength in March is one positive data element to focus on, while the overall level of private sector investment also appears to remain strong. The real weaknesses are in auto sales, public investment and real estate generally, categories to keep an eye on in the future.

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