China: All ‘Hard Landings’ Should Be So Soft
The China “hard landing” alarms are starting to get loud. During a conference in Singapore last week, Adrian Mowat, JPMorgan Chase’s (NYSE:JPM) chief Asian and emerging-market strategist, came right out and made the hard landing call. In fact, Mowat said the issue now is even beyond debate.
“If you look at the Chinese data, you should stop debating about a hard landing,” said Mowat, who added, “Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.”
Well, if there’s one thing we know, nearly every issue on Wall Street is debatable.
I think you’d get an altogether different picture about China if you asked Jim O’Neill, Goldman Sachs (NYSE:GS) asset management chairman; Stephen Roach, Yale University professor and former nonexecutive chairman for Morgan Stanley (NYSE:MS) in Asia; or my friend and colleague Robert Hsu, editor of the China Strategy and Asia Edge newsletters.
Hsu spends as much if not more time researching China’s economy than just about anybody, and he does it by actually going to, and doing business in, the country. I’m a big admirer of Hsu’s views on the markets and the economy, particularly when it comes to China.
While Hsu does acknowledge that some of China’s metrics are signaling a slowdown in growth, he doesn’t think the slowing fits the “hard landing” description. Remember, a hard landing is generally defined as a sharp and sudden deceleration in growth, and in this case Hsu says it is neither sharp nor sudden.
“At the heart of the hard landing argument is the recent lowering by the Chinese government of its full-year growth target from 8% to 7.5%. However, China is great at tempering expectations and then exceeding those expectations when the time comes,” Hsu told me.
He added: “In the past, China has come out with growth forecasts that they knew were well below what they could actually achieve. For example, Chinese Premier Wen Jiabao said in 2011 the Chinese economy would grow at an annual rate of just 7.5% for that year. He was wrong. In fact, China’s GDP grew 9.2% last year.”
Hsu doesn’t expect China to grow at the pace it has in prior years, but he does think it will achieve an 8% GDP growth rate in 2012. Moreover, he thinks the hard landing scenario is pure fiction. “The fact is that China is still building; Chinese incomes are still rising; China’s consumers are still gobbling up luxury retail goods; still buying loads of high-tech toys; still going to movies in record numbers; and still buying health products like never before,” said Hsu.
I am not in a position to offer an analysis of the Chinese economy the way Hsu or Mowat can, so it’s impossible for me to vet their respective arguments in detail. However, I can say that if an economy the size of China lives up to Hsu’s 8% annual GDP growth, that’s one hard landing I think most countries — including the U.S. — would envy.
Hey, if only all hard landings could be so soft, the global economy would be in strong shape.
I think the bottom line here is that the hard landing rhetoric shouldn’t discourage investors from considering outstanding Chinese stocks. Stalwart companies such as Internet search company Baidu.com (NASDAQ:BIDU), telecom firm China Mobil (NYSE:CHL) and state-owned oil company CNOOC Limited (NYSE:CEO) are just some of the many Chinese companies that have the potential to perform very well even if the country just meets its current growth projections.
And if the hard landing crowd is proven wrong by the data, then look for some real Chinese fireworks in the future.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.
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