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A Chinese Headwind

March 21, 2012
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One headwind of more immediate concern to this market than even oil prices is the economic slowdown in China. In recent days, investors have turned sour on Chinese stocks. The chief reason why is the slowdown in the growth rate of the world’s second-largest economy.
 
Recently, the Chinese government lowered its full-year 2012 gross domestic product (GDP) growth target from 8% to 7.5%. That slowdown is substantial, especially given the size and influence the Chinese economy has on the rest of the global economy. However, the story involves more than just a slowdown in China’s rate of growth.
 
We just received the news that Chinese auto sales this year will probably miss their 8% growth forecast as the slowing economy and rising fuel costs curb buying. Auto sales are a big canary in the coal mine for an economy, and a slowdown is a bad omen for Chinese GDP growth.
 
Perhaps even worse than the auto-sales slowdown is a fizzling Chinese real estate bubble. For the past five months, real estate values have been falling sharply, and there doesn’t seem to be much that Beijing’s policymakers can do to staunch the bleeding. Much like our own real estate bubble in the United States, there was too much inventory build out during the boom days. As we all know, that situation corrects itself in a very painful manner.
 
The effect of the recent downbeat news in China has been a sell-off in stocks tied to the country’s fortunes. The chart here of the iShares FTSE China 25 Index (FXI), which tracks China’s large-cap stocks, shows the fund’s share price breaking down below its 50- and 200-day moving averages.
 
 
One more thing that is troubling about China is a growing chorus of calls that the country already may be immersed in a so-called “hard landing.” The latest, and perhaps most significant, hard-landing call comes from Adrian Mowat, JPMorgan Chase & Co.’s chief Asian and emerging-market strategist.
 
During a conference in Singapore last week, the respected Mowat said the issue of a hard landing in China now is 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.”
 
If this assessment is true, then China’s hard landing represents a big headwind, not only for stocks in the region, but for stocks here at home — as well as the fortunes of the global economy.