Is China's Growth Grinding to a Halt?

After two years carrying the global economy on its back, China's economy is starting to slow. Auto sales growth slowed dramatically in April, and while China fights to bring inflation under control, it recently allowed electricity rates to rise in response to power producers complaining that high coal prices were limiting their ability to turn a profit as electricity demand grows.

This is bad news for General Motors (NYSE: GM  ) and Toyota Motor (NYSE: TM  ) , because they're looking to China as a growth engine continuing to help pull them out of their respective funks. But a slowdown in the economy isn't really a surprise. China's massive stimulus program during the global recession spurred growth, but as the rest of the world implemented their own spending programs China was hit by inflation in food and basic commodities. As spending on necessities makes up a larger part of incomes in emerging economies, the rising prices are more likely to slow down spending on consumer discretionary items and big purchases.

Warning signs
China sees the same rising prices we do here, but there have been signs that China's struggles with inflation are more painful. Last month, Chinese regulators fined Unilever (NYSE: UL  ) more than $300,000 for publicly mentioning that it was planning to raise prices on soap and detergent. The government claimed talk of rising prices caused panic buying by consumers. Unilever has long-term growth plans in China, so it is paying the fine and playing nice, which is the right long-term move, but prices will eventually have to rise.

Then there is the unbelievably sad story of a businessman in Inner Mongolia who took his own life, because he could no longer afford to service the debt taken on to grow his business. Every business cycle claims businesses that over-leverage when things are going well, but paying back debt becomes doubly hard when faced with price caps.

The news isn't all bad
Even with all the bad news, China is still looking at 9% GDP growth or better this year, and targeting long-term growth of 7%. This might be why some firms don't seem very concerned. Coca-Cola (NYSE: KO  ) has been very successful in China and is taking steps that show it expects to continue its rapid growth in the country. Coca-Cola has plans to spend $2 billion expanding in China and is looking into a listing on the international board of the Shanghai exchange. Since Coca-Cola doesn't need to raise equity, a listing in China is primarily about building its brand in the country. The beverage giant is not alone, Unilever and HSBC Holdings (NYSE: HBC  ) are also looking at listing in Shanghai.

Metal and mineral giant Rio Tinto (NYSE: RIO  ) is excited about its prospects in China, too. This is despite all the talk about a bubble in Chinese real estate and China's infrastructure spending slowing down. Rio sees the continued build-out of high-speed rail, subway systems, and infrastructure projects in China's interior powering its results for years to come, and sees the housing market as imbalanced, but not a bubble.

New winners in a changing market
I'm not quite as optimistic on Rio Tinto's prospects for the next couple of years, because the government is doing all it can to slow down the housing market and banks are starting to pull back on the loans that have funded the infrastructure boom. I do, however, see a bright future for Coca-Cola, Unilever, and other consumer goods firms in China. Inflation might bite in the short term, but the steps being taken to slow the economy should slow inflation, too. With plenty of savings in their bank accounts, a government pushing consumer spending growth, and increasingly robust infrastructure, consumer spending in China's cities is well-positioned to grow.  

As we've done the past few years, the Motley Fool Global Gains team is heading to China in a few weeks; we'll be focused on the best opportunities to capture the growth in Chinese consumer spending. Our focus will be on domestic opportunities, but we'll also be looking for U.S., European, and Japanese firms making underappreciated progress in China. Get all of our dispatches in real time from the field by signing up with your email address in the box below.

Nathan is the co-advisor of Motley Fool Global Gains. He owns shares of Coca-Cola. Motley Fool newsletter services have recommended buying shares of General Motors, Coca-Cola, and Unilever. 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.


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  • Report this Comment On June 07, 2011, at 3:53 PM, fun2bretired wrote:

    I believe US brokers, are a little worried about what is happening in China. With Baidu scoring major points, but stocks like Renren, slowing down.

    Has Renren Inc. Lost Its Steam?

    http://www.associatedcontent.com/article/8065379/has_renren_...

    Maybe they are pulling back a little in China. I know a few brokers looking more in US stocks than other places. Bad move. I think.

  • Report this Comment On June 07, 2011, at 10:22 PM, astralis wrote:

    There is too much hidden in China. Even the top four accounting firms are getting fooled by fake information. It's nice to see some people actually go on the ground but showing us what opportunities exist is like ignoring the elephant in the room.

  • Report this Comment On June 08, 2011, at 12:28 PM, TMFDoraemon wrote:

    @astralis Not all opportunities in China come from companies based in China. We try to keep this broad view and look at China from all angles.

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