China Must Grow
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While China casts an imposing presence internationally as the world's second biggest economy and a powerful export machine that has booked more than $3 trillion in foreign reserves, domestically Beijing has concerns about an "Arab Spring" uprising that might topple the current leadership. In an interview earlier this year on PBS with Charlie Rose, United States Ambassador Gary Locke replied to a question regarding concerns in the People's Republic about an event like that of the Arab Spring, stating that officials in Beijing "are very fearful of something similar happening within China.”
To prevent this from transpiring, economic growth must continue in China. From this, companies that export to China such as Alcoa (NYSE: AA), Boeing, (NYSE: BA), Caterpillar (NYSE: CAT), BHP Billiton (NYSE: BHP) and Vale (NYSE: VALE) will profit. The current low share prices of any should be looked upon as an exercise in value investing. Each provides dividend income to pay for a long term investor to wait.
The growth of the Chinese economy has been the major global story of the past decade, other than The Great Recession. While the current news could certainly lead many to believe that the business climate in China is bad, growth this year in the People's Republic was 8.1% in the first quarter; and is expected to come in at 7.5% for the second. Not the 10% average annualized rate since 2000, but still impressive. In addition, China is still an exporting powerhouse with a trade surplus for the month of May just reported to be $31.7 billion.
Continued demand from China has been a major factor in the business model for the future for many major corporations. The largest exporter in the United States, Boeing is building new facilities to produce a new version of the 737, the MAX, which is ideal for the regional market in China and the rest of Asia for a reason. Caterpillar, the biggest heavy equipment maker in the world and based in Illinois, has 16 manufacturing facilities in China with nine more under construction that will double the number of its employees in the People's Republic to 22,000 by 2015.
Alcoa, BHP Billiton and Vale all feed the commodities needed to sustain the voracious appetite of China's export-oriented economic machine. Alcoa, the biggest aluminum maker in the world, just beat Wall Street estimates for Q2 earnings; with analysts projecting global demand to increase by 7% in 2012, with China being 4% of that amount. Australia's BHP Billiton is the world's biggest mining company with a huge presence in China. Vale, based in Brazil, is the largest iron-ore exporter globally with much of its product being shipped to factories of the People's Republic.
As a result of the global economic slowdown and reduced demand from China, each of these companies is selling close to its 52-week low, except for Boeing. Alcoa is trading around $8.75 in a year when its price has ranged from $8.21 to $16.42. Now at $83.10, Caterpillar, a very volatile stock with a beta of 1.85, has been between $66.59 and $116.46 over the past year. BHP Billiton is around $64.30, much closer to its 52-week low of $59.87 than the high of $94.90. At $19.70, Vale is above its low for the year of $17.62 but far beneath the $31.47 peak. Boeing, at about $74, is nearing its high for the year of $77.20, well above the $55.01 bottom.
Each of these is a solid blue chip company with stable dividend income. Alcoa, Boeing and Caterpillar are all members of the Dow Jones Industrial Average. BHP Billiton and Vale are among the largest companies in their home country.
China is in a unique position in the global economy, shared only with the United States. The Chinese economy must continue to flourish. An Arab Spring type event would be calamitous for the global economy. Just the present decline in growth in China has been bad enough. China is the world's biggest exporter and biggest importer of far too many goods and services for a major slump to transpire without tremendous adverse effects. China's capital exports has allowed for low interest rates to be maintained in the United States and Europe. Although it would be counterproductive, China could cause great damage in international capital markets with over $3 trillion in foreign reserves.
China has economic problems, just like the United States. But the economy of the People's Republic is growing and there are signs of further recovery, as a survey by GK Dragonomics of the local housing market in 100 major Chinese cities just posted encouraging sales data. Export growth for June was 11.3% high than for a year earlier. With the world's highest saving rate and trillions in foreign reserves, there is much Beijing can do to stimulate the economy, and must do to maintain domestic tranquility and prevent an Arab Spring uprising. The more that China grows as a result, the more the share prices of Alcoa, Boeing, Vale, Caterpillar and BHP Billiton will rise from meeting the demands of the expanding economy of the People's Republic.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.