The End of the China Story Is Your Golden Opportunity

China is going down. Now, make no mistake; that is not a fact (nor is it some schoolyard-style nationalistic threat). But it is my opinion, and in my opinion, my opinion is just as good as a fact. I am confidently making my call for 2011: China will see its growth slow and it will cause turmoil in financial markets around the world.

"But Nate," you may protest, "we just learned that China grew even faster than we originally thought in 2009, and estimates put 2010 growth at over 10%. Don't risk your hard-earned reputation with such a brazen proclamation."

To which I would reply, "Pish-posh." And, "Nice vocabulary."

All good things
Now that I've gotten on your good side by complimenting your word bank, let me climb down a bit and qualify my previous statement.

After three decades of economic growth near 10% per year, I definitely think China's growth will slow in 2011 and the years ahead. However, this doesn't mean I am predicting an all-out collapse, although I do think markets will behave as if it is.

The government's stimulus package and a very liberal lending program helped pull the country through the global financial crisis, but since then, the banks haven't been able to turn off the spigots.

In 2009, Chinese banks poured $1.4 trillion (that's with a "T") in new loans into the Chinese economy. Remember, this is a country with a GDP just over $5 trillion. Then Beijing tried to show restraint in 2010 by limiting loan growth to $1.1 trillion, but the banks didn't listen and instead doled out another $1.2 trillion.

Who took the punch bowl?
Leaving aside the question of the quality of all these new loans, this much new money flooding into an economy usually leads to inflation (more money chasing the same amount of goods leads to rising prices). And we have seen this. While Beijing reported inflation in 2010 at a reasonable 3.3%, this included a 7.2% rise in food prices. Additionally, Chinese consumers saw prices rise 5.1% in November, 4.6% in December, and rumors have it jumping toward 6% in January. One thing China's government can't have is hundreds of millions of people no longer able to afford food.

To prevent this, China's banks have backed off to a goal of only 14% loan growth in 2011 and have decided to go with a month-to-month, bank-by-bank evaluation to make sure things aren't getting too crazy. In coming months, we'll likely see Beijing's foot move more firmly to the brake pedal with more significant interest rate increases. (The central bank raised interest rates 0.25% in October and December). As this massive source of stimulus is choked off, a slowdown in GDP growth is likely to follow.

In this together
If Chinese growth slows, that means its massive demand for natural resources like coal, copper, iron, and food will slow. If China's demand slows, resource-rich countries like Australia, Brazil, and Canada (or the Alphabet Group, as I like to call them), which have seen their economies and currencies buoyed by rising commodity prices, will falter as well.

But just like a slowdown in Chinese growth doesn't mean an end to Chinese growth, the mining and ag industries may tremble, but they won't disappear. However, this subtlety will likely be missed by Mr. Market, which means investors with a long-term investing horizon will be presented with an opportunity.

That's when you strike (it rich)
While markets panic about Chinese growth dropping below 9% and commodities start to sell off, investors with an eye three to five years down the road will get a chance to pick up high-quality companies at discounted prices.

BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RIO  ) have massive operations around the world; specifically, their copper, iron, and coal mines in Australia have been working overtime just to keep up with Chinese demand. Brazilian mining giant Vale (NYSE: VALE  ) has been helping, too. Just as all of these companies have benefited from the rebound in metals prices, their short-term earnings will take a double hit when China's demand slumps and global inventories rise, pushing prices down.

On another front, farmers in America, Brazil, Argentina, and Australia have been reaping the benefits of Asia's rising middle class as demand for more and more varied foods has grown. This has also meant higher demand for fertilizers and equipment, meaning boom times for companies like Canada's PotashCorp (NYSE: POT  ) , as well as Deere (NYSE: DE  ) and Caterpillar (NYSE: CAT  ) .

All of these are high-quality, well-run companies positioned to profit from significant secular trends in emerging markets, including rising middle-class consumers, urbanization, and vast infrastructure needs.

They are all also in cyclical industries, and a slowdown in China will result in a downturn in those cycles. That is when long-term investors will be given a chance to fill their portfolios with these stocks at sale prices. Unlike my opening salvo, this isn't just my opinion, this is exactly what we saw in late 2008 and 2009. Growth in emerging markets will slow, but it will continue, and getting exposure to these types of companies at good prices will ensure your portfolio grows with them.

I want more
The only problem with these companies is they are large multinationals and their growth potential, while still significant, is limited just because of how big they already are (Warren Buffett refers to it as the law of large numbers). The really exciting stories are the high-quality small companies that call the Alphabet Group home.

The problem is sifting through all those small companies and finding the ones that have what it takes to eventually become large multinationals. That's where The Motley Fool's Global Gains team, led by co-advisors Tim Hanson and Nathan Parmalee, comes in. They dig in and do the research necessary to separate the great companies from the wannabes.

It just so happens they will be heading to Australia in the next few weeks to do just this. If you're interested in getting their dispatches from on the ground Down Under, all you need to do is enter your email in the box below.

Nate Weisshaar may have a high opinion of his opinion, but he does not own any shares of the companies listed above. 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's disclosure policy once discovered a lost Shakespearean work in a can of alphabet soup.

Read/Post Comments (4) | Recommend This Article (16)

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  • Report this Comment On February 03, 2011, at 4:03 PM, dfrizzle03 wrote:

    i reply "pish posh" to your argument. 2011 will continue to be a year of recovery in countries and stock markets around the world. if ur trying to predict a recession in China... look a little further into the future

  • Report this Comment On February 03, 2011, at 7:23 PM, ouiallo123 wrote:

    First of all I do not understand why your opinion should become fact. As I understand you are only takling about one perspective, your personal one... I come from an other country myself and am visiting familly here in australia and I have noticed a large quantity of overlooked opinions like yours. Wich I think is overall discusting... It's time people like you stop making debates sitting on your chairs and go out and see the facts for yourselfs. The rest of the world doesn't think this way, and every facts must be taken into consideration before making an opinion; ie; Au. is not the centre of the world... Most australian only consider their own economic growth when comparing the rest of the world without considering the prices of commodities, recources and exchanges wich is usually far more expensive than the rest of it's neigbours.. do the math... you might be earning a highier wages (about twice as much as my own) but the prices of every commodities is more (about 5 to 6 times more than where I am from + your money is worth less on top of it) so the spending rate of customers is less in general, the imports are cheeper and doesn't help the local economy and like a vicious circle, life becomes more expencive...

    hosh posh and talk to investers in other countries before judging them, not just your wallet... the economic crisis in the world is not just based on stocks but also on the way companies and consumers are involved... Buy "Australian made" and you will be helping yourself..

    Ps: "no I am not American", but I refuse to say where I am from because I don't need to hear any opressive and racist comments by single minded fools who would like to be better than everyone else.

  • Report this Comment On February 03, 2011, at 10:47 PM, ky0ung wrote:


    You seem to be insulted by this article. It is purely an opinion and he is not insulting any emerging market at all. He is saying that China is going to eventually slow down its growth, which it will eventually have to. The result from a slow down in growth is just going to cause a market overreaction, which will probably drive down commodity prices. He is not even talking down to Australia, it just happens to be a resource rich country that will be affected by China's growth slow down.

    Personally I feel that China won't slow down as soon as this year, but it will eventually slow down within the next 3-5 years(everyone should be prepared!).

  • Report this Comment On February 04, 2011, at 9:32 PM, HJCampbell wrote:

    China’s Innovative Way of Skinning the United States!

    Insanity: doing the same thing over and over again and expecting different results. – Albert Einstein

    As long as the United States continues to allow China to manipulate the U.S. Dollar and therefore manipulate our trade with ALL our trading partners:

    - our balance of trade with ALL our trading partners will be worse than it would otherwise be.

    - free trade agreements will work to our disadvantage and we should halt entering into new ones.

    Mark Twain is credited with an early use of the cliché "more than one way to skin a cat" in A Connecticut Yankee in King Arthur’s Court, as follows: “she was wise, subtle, and knew more than one way to skin a cat, that is, more than one way to get what she wanted”. defines beggar-thy-neighbor as: an international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners. Under the guise of fostering ‘indigenous innovation’, the Chinese government has creatively used a non-conventional, subtle version of beggar-thy-neighbor. Its version doesn’t entail the competitive devaluation of its own currency, which would enhance China’s exports and inhibits its trading partners’ exports to China. China’s version perpetrates an over-valuation of the currencies of one or more of its trading partners. This negatively affects all the trade of the pegged trading partner(s), not just trade with China. During the recent period China pegged its currency to the U.S. Dollar, its version of beggar-thy-neighbor was 8 times as damaging to the U.S. economy as what the media refers to as “China keeping it currency undervalued”.

    In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Until action is taken on Buffett’s or a similar balanced trade model, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

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