It’s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a “hard landing.” American and Europeans haven’t seen that kind of growth in decades — and they could desperately use it today. Yet such is life is China; after years of growing at a blistering pace, growth of “only” 8.1% represents a slowdown.
The 8% mark is considered by many to be the minimum growth rate China needs to maintain high employment and to keep living standards rising. And by the government’s own calculations, Chinese growth likely will slip below that level for the full year 2012. Citing weakness in China’s European export markets and lower construction spending, the Chinese government lowered its full-year target to 7.5%.
The Chinese government doesn’t take its own GDP numbers seriously (they know the numbers are baked), and neither should we. But other trends are even more sobering:
- China’s imports grew by a pitiful 0.3% in April, compared to an average growth rate of 25% throughout 2011. It is no shock that this has coincided with a general selloff in commodities prices.
- Electricity consumption grew by just 0.7% last month vs. 7.2% the month before.
- Growth in rail cargo volume has been cut in half.
- And bank lending? With the government actively trying to deflate a housing and construction bubble, bank lending has slowed dramatically.
Now that I’ve bombarded you with scare statistics, how should we react as investors?
First, step back and try to keep perspective. Yes, there is a steady stream of bad news coming out of China that signals slow growth ahead. But “slow growth” is clearly a relative term when your economy is growing at a 7%-8% clip.
China’s leaders are not fools, and they realize the model that has served them so well in recent decades — manufacturing cheaply and exporting to the West — is broken.
Realizing this, China’s leadership indicated earlier this year that “the key to solving the problems of imbalanced, uncoordinated, unsustainable development (in China) is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.”
In other words, it is the stated objective of the Chinese government to de-emphasize investment and instead boost domestic consumption.
Investors wanting to profit from the reorientation of China can follow two trends:
- Avoid commodities and the firms that produce them or even look for opportunities to go short. China has been the overwhelming force behind the commodities bull market of the past decade, and without aggressive Chinese buying there is no bull market.
- Buy the companies that stand to profit from a Chinese consumer shopping spree. My preferred “fishing pond” is the luxury goods sector, defined here as everything from flashy handbags to performance automobiles.
Consider what The Economist has to say about China’s demand for luxury:
“More than half of this year’s growth in luxury goods will come from China, where sales are set to soar by 24% in 2012. The country is already the largest market for jewelery after America, and for gold after India, and is gaining fast on both leaders. Prada and Gucci owe a third of their global sales to the rich in China. CTF saw same-store sales on the mainland shoot up by 45% from April to September last year.”
This week Richemont, owner of the Cartier brand (among many others) and the world’s second-largest luxury retailer by sales, announced that sales and profits rose 29% and 43%, respectively, largely on strong demand from China. Perhaps surprisingly, demand in Europe was robust, with sales up 20%. Crisis or not, it would appear well-heeled consumers are spending freely on life’s frivolities.