Will China's Accounting Cause a U.S. Stock Correction?

Are China's national accounts accurate, or is it manufacturing GDP statistics in order to support the idea that it is floating above the global recession? The latter is admittedly the most extreme answer to the questions that credible sources are raising concerning the legitimacy of China's GDP data. Whatever the explanation, these questions have troubling implications for U.S. investors.

In its Oil Market Report of May 14, the International Energy Agency noted that China's reported growth in real GDP for the first quarter -- 6.1% -- is inconsistent with its demand for electricity and oil during the same period, with the latter declining 3.5% year over year.

Your sums don't add up
Yesterday, the Financial Times pointed out that summing the first-half GDP numbers from China's 31 provinces and municipalities produces an aggregate that is 10% higher than the national GDP figure published by the central government, raising fresh doubts about the quality of China's statistical apparatus.

The conundrum of Chinese GDP could ultimately have consequences beyond Chinese stocks (some of which have enjoyed spectacular returns this year -- see the table below) or even companies that are active in China, such as Coca-Cola (NYSE: KO  ) , General Electric (NYSE: GE  ) , or Procter & Gamble (NYSE: PG  ) .

 

Year-to-Date % Return

Price-to-Earnings Ratio*

Baidu (Nasdaq: BIDU  )

169%

39.0

Suntech Power (NYSE: STP  )

76%

28.0

Shanda Interactive (Nasdaq: SNDA  )

56%

13.4

American Oriental Bioengineering (NYSE: AOB  )

(8%)

7.1

*Based on next fiscal year's earnings per share.
Source: Capital IQ, a division of Standard & Poor's.

Don't rock the boat
As I noted on Monday, U.S. stocks are currently overvalued; indeed, the market appears to be pricing a robust recovery with certainty -- something that is anything but certain. Current valuations will not tolerate much perturbation in sentiment if they are to remain at this level; a wholesale revision of expectations of China's short and medium-term growth would certainly be enough to upset the U.S. market.

The lesson for investors
Investors are warned: If you own U.S. stock indexes, make sure you're comfortable with the level of your exposure. If you're invested in individual stocks, keep an eye on their valuations. Finally, you should definitely have exposure to international stock markets -- although China isn't my first choice right now.

Global Gains co-advisor Tim Hanson won't overpay for growth, and he explains why he'll make money in China.

Jeremy Grantham, one of the most respected practicing investors, now believes U.S. stocks will return less than their long-term historical average over the next seven years. For that reason, it’s important that you have significant exposure to international stocks in your portfolio. Sign up for a 30-day free trial of Global Gains to find out their five best investment ideas right now.

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Baidu, Shanda Interactive Entertainment, and Suntech Power Holdings are Motley Fool Rule Breakers recommendations. Coca-Cola is a Motley Fool Inside Value selection. Coca-Cola and Procter & Gamble are Motley Fool Income Investor selections. American Oriental Bioengineering is a Motley Fool Global Gains pick. American Oriental Bioengineering is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Procter & Gamble and American Oriental Bioengineering. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2009, at 5:16 PM, sisula wrote:

    Dear Motley Fool,

    how is your AOB holding doing today? I see some 16 % haircut.

    Regards,

    sisula

  • Report this Comment On August 05, 2009, at 5:28 PM, cs111 wrote:

    Sisula,

    An article came out today concerning possible irregularities of AOB's recent land purchase transaction. Go to www.asensio.com and read for yourself. This may have caused it.

    Leo

  • Report this Comment On August 06, 2009, at 1:50 AM, Toburk wrote:

    I posted a long article that pertains to this yesterday, particularly concerning how China accounts for it's GDP and how it differs from most other countries (Government spending is counted as GDP on announcement rather than on spending, sales counted when an item is produced rather than sold etc.)

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=238029&t=0...

    For example, China's official numbers do not show its possible recession in 88-89, nor it's slowdown in the late 90's, but simultaneously underestimates growth in between the two events.

  • Report this Comment On August 06, 2009, at 9:06 AM, Allisvanity wrote:

    This website has been pumping out propaganda for AOB incessantly, for reasons it doesn't take a genius to figure out.

    Still, the company did look solid. I don't know how AOB planned to use their new resort to 'train' anybody, but hey, maybe now you guys will take a more tempered approach to hyping up stocks.

  • Report this Comment On August 07, 2009, at 12:44 AM, lwbaum wrote:

    Maybe AOB planned to use their new resort to 'train' their investors not to be gullible and believe company press releases. Unfortunately, it didn't work for me.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 958234, ~/Articles/ArticleHandler.aspx, 10/1/2014 12:36:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement