A China Turnaround? 5 Key Issues Still at Play

Shipping, housing, stocks and more are throwing up warning flares

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China is in dire straits, with many investments in the region taking a bath in the last year or two. But there are signs of life in certain areas.

Consider that China oil major CNOOC Limited (NYSE:CEO) is up 18% so far in 2012, double other oil majors like Exxon Mobil (NYSE:XOM), and recently made a huge $15 billion bid for natural gas company Nexen (NYSE:NXY).

Then take this line from Daisuke Nomoto, portfolio manager of Columbia Pacific/Asia Fund (MUTF:CASAX): “The worst is over for China,” Nomoto says. “In the third quarter of this year, we should begin to see the positive impact of all the monetary and fiscal policies.”

So is China still crashing, or is China turning around?

Unfortunately, there still are some major concerns worldwide to work out — the least of which are recession in Europe hurting demand and the prospect of continued consumer pain in America. Here are a few key points that prove China still is very much a risky bet right now:

Chinese Shipping Trends

A rather obscure trade site, Lloyd’s Loading List, reported on Monday that the Shanghai Containerised Freight Index has fallen by more than 5% in the past week. That’s especially troublesome considering that now is theoretically the peak shipping time for the Western holidays. Demand tends to be high in September and October to stock retailers for November and December.

But “volumes have fallen on the trades into Europe and rather than the usual seasonal surge in cargo, lines have been forced to reduce capacity by blanking sailings or suspending services.”

shanghairotterdam A China Turnaround? 5 Key Issues Still at PlayThat’s troubling. Even more troubling is this chart from FT.com blog Beyondbrics:

True, there’s more traffic from China than just the Shanghai-to-Rotterdam route … and even after recent falls, shipping rates still are higher than they were a year ago. But the trend is worth noting.

Further reading also comes from MarineLink.com, where execs from major shipper Maersk are quoted as saying that China’s slowing trade indicates the nation “may have lost some of its competitiveness in some areas of the manufacturing sector.” Furthermore, Maersk officials say China’s shift from labor-intensive to capital-intensive manufacturing is a natural given the growth phase the nation is now in — but that exports of more sophisticated products are unlikely to offset the dip in volume in the short-term.

The bottom line is that if shipping and exports look anemic, China can’t be doing well.

China Housing Still Ugly

There has been talk of a China property bubble for many months now — I beat that drum myself, in fact, way back in February. And during the past 11 years, the investment in residential housing as a percentage of China’s GDP has tripled. Sound like another housing-led bubble that American investors might know intimately?

It doesn’t help that China’s economic stimulus efforts have effectively increased the country’s money supply — but policies and culture leave that money trapped, with nowhere to go domestically but real estate. Hence the crazy stories of ghost cities full of empty commercial real estate and condo complexes. Where else can you put your cash if you’re in China, especially with equities underperforming so dramatically?

wsjchina A China Turnaround? 5 Key Issues Still at Play The result was a bubble. And here’s a chart from the WSJ showing the steep drop in home prices that has only recently started to bottom.

Some think housing might be ready to turn around. But remember, we did not see a V-shaped recovery after our housing crisis in America, and it’s unrealistic to think a snap-back will happen in China.

Furthermore, there is more bad news lately: Premier Wen Jaibao placed controls on housing prices after the crash to prevent another overheating. And while things are less bad, they certainly aren’t good. Consider that compared with 2011 numbers, prices of newly built homes fell in 53 of the 70 cities in August vs. 58 cities with a downturn in July.

That’s “better,” per se, but 76% of cities seeing falling prices still is not a good thing.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/a-china-turnaround-5-key-issues-still-at-play/.

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