A downbeat outlook from China's manufacturing sector couldn't hold back Hong Kong's Hang Seng (HSIINDICES:^HSI) from big gains this week, as the index pulled in gains of 2.7% over the past five days. It was a welcome turnaround for the index for China investors, who have dealt with the nation's stocks sliding all year. To date, the Hang Seng has lost more than 6% in 2013 in one of the worst performances for a stock index in a major global economy.
Manufacturing may be down in China, but is the country's undeniable slowdown setting up the nation for long-term stability? Let's dive into what's ahead from the world's second-largest economy -- and what investors need to watch out for.
The pros and cons of a planned slowdown
China's manufacturing sector has been sliding for months. July's preliminary PMI reading by HSBC didn't offer any hope for improvement this month, coming in at contraction territory with a reading of 47.7 this week -- a half percentage point lower than June's reading. The country's credit crunch has tightened lending across China's financial sector, part of a wider slowdown in manufacturing, as the government has reduced infrastructure investment. Still, some analysts project that Beijing will step in if growth slows too much, particularly as China's GDP reading last quarter came in at 7.5% -- far below the growth of recent years.
Yet, some of manufacturing's decline could be planned. Beijing's let much of the ongoing cash crunch occur without propping up its financial sector with stimulus like the U.S. and Japan have done. The result will hit growth hard now, but in the long term, the hands-off policy is designed to weed out shaky banks and lenders and letting them fail. The planned slowdown has extended to manufacturing, as the Chinese government has ordered domestic companies to cut excess production in light of slowing growth.
The question now is whether or not that deliberate slowdown will impact China's growth too much for Beijing to bear. For investors, it's made finding growth stocks in this former growth haven a more challenging prospect. Some small firms in China have exploded into star-studded growth stories in the past -- the solar industry being a notable example -- but with Beijing more inclined to let poorly run firms live and die on their own merits, it's more important than ever for you to look for solid and strong companies to invest in across the Pacific, rather than taking a flier on high-risk gambles.
One of China's biggest stars still looks to be on pace for solid long-term growth, however. Oil major Sinopec (NYSE:SHI) has had a tough time this year, with shares dropping more than 10%, but Chinese energy demand is only bound to increase, as the nation's middle class grows, and urbanization picks up. China and fellow emerging nation India are poised to fuel a 56% growth in world energy consumption over the next three decades, according to the U.S. Energy Information Administration. Sinopec's poised to capitalize on growing domestic demand, especially with the considerable growth in the country's automotive market. Considering that Sinopec's already one of the five largest firms in the world by revenue, this is hardly a high-risk growth stock, and is a solid option for investors looking for safer Chinese stocks.
If you're looking to capitalize on that growing middle class, however, there may no greater investor-friendly movement in China than the intense demand for infant formula. Infant nutrition demand has exploded in the country, even though Beijing's one-child policy has reduced long-term population estimates. Leading nutrition providers like Abbott Labs (NYSE:ABT) and Nestle (NASDAQOTH:NSRGY) have raced to the top of investors' lists of emerging-market stars. With many Chinese citizens distrustful of domestic infant nutrition, imports have erupted, as a major influx of foreign infant formula products have arrived. China's surging demand will power these stocks for a long time to come.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.