More Signs China’s Economy Is in Trouble
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China’s economic growth has been a source of controversy in recent years.
Critics characterize the Chinese economic boom as nothing more than a credit-fuelled bubble, one destined to burst with disastrous consequences. In contrast, supporters see the country in the midst of a great transformation, on its way to becoming the world’s next superpower.
More evidence came out in favor of the bears overnight Tuesday. HSBC’s China flash PMI fell to an 11-month low, coming in at 47.7 for July. The reading measures the health of China’s manufacturing sector.
If China’s economy is in trouble, many US-listed companies could be exposed. In particular, Caterpillar (NYSE: CAT), General Motors (NYSE: GM) and Southern Copper Corp (NYSE: SCCO) could disappoint investors.
Signs China’s economy is slowing down
About two years ago, famed economist Nouriel Roubini warned that the Chinese economy was due for a “hard landing” in the second half of 2013. Observing China’s enormous fixed investment, Roubini argued that China’s economic expansion was unsustainable.
Increasingly, it’s looking like Roubini may have been onto something. The bad PMI print is just the latest in a series of negative reports. In June, China’s official GDP report showed that the country’s economy grew just 7.5%. Earlier in July, Chinese trade data showed that both exports and imports contracted at a rate much worse than anticipated.
Caterpillar is dependent on the mining industry
Short seller Jim Chanos has been an outspoken critic of China’s economy. He’s been short the Chinese property developers, arguing that there’s a dangerous real estate bubble in China.
But last week, Chanos turned his focus to an American company, targeting Caterpillar in a presentation at CNBC’s Delivering Alpha Conference.
Caterpillar is a tertiary play on Chinese economic growth. Half of its operating profits come from mining companies, which has been to Caterpillar’s benefit in recent years. The market for commodities has been in a sustained bull run, largely due to China’s infrastructure build out.
But if China’s economy struggles, the commodities market should likewise suffer. That would put pressure on the mining industry as a whole, and therefore on Caterpillar.
General Motors sees China as a key growth region
It wouldn't be fair to characterize American auto giant GM as a play on China. The company still depends mostly on North America, and gets revenue from nearly all corners of the globe.
Still, GM has been looking to China for its growth. In its most recent 10-K, GM writes that “maintaining a strong position in the Chinese market is a key component of our global growth strategy.” The company dedicates an entire section to China, noting how important it is to GM.
GM has been successful in China, increasing its market share in the country for the last three years. As a percentage of total revenue, China brings in about one-fifth.
A Chinese economic collapse would not necessarily decimate GM’s business -- shares of rival Ford have held up pretty well in recent years despite its large exposure to the European market.
But investing in GM isn’t as a simple as noting the average age of a car on America’s roads.
China is the world’s dominant copper consumer
As its name suggests, Southern Copper Corp is a big copper producer. Last quarter, the company mined nearly 150,000 tons of copper, which accounted for the vast majority of its earnings and revenue.
China surpassed the US to become the world’s largest copper consumer over a decade ago. In the ten year period between 2001 and 2011, Chinese copper demand increased over 200%, and in 2011, China consumed almost half of the world’s copper.
Copper prices have been falling over the last year, as commodity traders may be pricing in a Chinese hard landing. Along with it, shares of Southern Copper have dropped over 8%.
But if China’s economy weakens further, demand for copper should likewise continue to fall. That wouldn't be good for Southern Copper shareholders.
A Chinese slowdown could weigh on the markets
Ultimately, China is a major part of the global economy, and perhaps the single biggest driver of growth since the financial crisis. If China’s economy runs into severe problems, many corporations are going to face challenges. Some more so than others.
Caterpillar is an indirect play on Chinese economic growth, as it sells equipment to the mining industry. Southern Copper, as a miner, is a more direct play, as China is the world’s dominant copper consumer. GM isn't nearly as leveraged to the Chinese economy, but the auto giant has focused on China as the source of future growth.
If Chinese economic data continues to paint a bleak picture, it might not be wise to be holding any of them.
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Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends General Motors. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!