The Risk of a Hard Landing in China

With China’s GDP growth slowing from the 9-10% range over the last few years to an expected 7.5% rate in 2012, much has been made of the risks a slower-growing Chinese economy poses to other economies and stock markets around the world. Granted, at a 7.5% growth rate, China is still one of the world’s fastest-growing economies, but the fear is that growth will continue to slow in coming years. And without China leading global growth, how does that affect the rest of the world’s economies that depend on their continued economic ascension?

Even if China’s economic growth rates continue to decline, the assumption that this will negatively affect the economies and stocks of China-focused countries and companies, respectively, is too broad. In all likelihood certain countries and companies will continue to excel depending on the specific products and resources that they sell/export to China. And in looking at where China is in its development relative to the United States, it appears to us that the opportunity will lie in consumer goods and services, while the greatest risks will be in natural resources.

While China has nearly caught up to the U.S. in terms of steel consumption, they are still well behind in their consumption of automobiles, airplane travel, and restaurant meals according to Credit Suisse. Regardless of how fast China grows in the future, the gap in consumption in these specific areas will likely continue to narrow between China and more developed nations like the U.S. At the same time, infrastructure spending will likely slow even if China continues to grow at a 7% to 8% rate because spending on natural resources like steel has already reached advanced stages relative to the developed world.
Focus on the companies and countries that will provide the goods and services that the Chinese consumer will likely continue to buy in an effort to just catch up with everyone else in the developed world. By doing so, you can mitigate some of the risk of an economic hard landing in China.

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