Is China back?
For investors, 2013 has been a disappointing year across the Pacific. The world's second-largest economy's slowdown to less than 8% annual GDP growth has hit Chinese markets hard, taking down Hong Kong's Hang Seng (HSIINDICES: ^HSI) index 1.7% in 2013 for a year when most major markets worldwide have recorded gains.
But the Hang Seng's pulled in new momentum recently and is up more than 9% over the past three months. It added another 0.5% during the past five days as China's economy shows signs of life -- and Beijing shows commitment to long-term growth and economic power. Are investors finally past the worst of China's market slump?
Committing to change
Beijing's not sitting around waiting for economic growth to come about on its own. The Chinese government this week swore to boost the country's future by promoting competition in a more open fashion, luring investment into the country. Chinese Premier Li Keqiang promised to focus in on consumption, and domestic demand in particular, as the country tries to rebound from last quarter's disappointing 7.5% annualized growth mark.
For investors, it's ostensibly a broad, but strong, idea. China's manufacturing and industrial boom has largely waned over the past few years as state-run enterprises like Chinalco (ACH -3.68%) and Baosteel flooded the worldwide markets with product, driving down demand and pricing and putting the materials sector into a bind. It hurt investors hard in that time, with Chinalco's stock alone down 24.6% year to date despite a slight recovery during the past few months.
The company also saw earnings nosedive into the red last year despite an uptick in sales, a trend that might extend into this year if the aluminum industry remains depressed. Unfortunately, with China pivoting away from the massive infrastructure pushes of its past and into a more consumption-oriented approach, Chinalco, Baosteel, and fellow materials producers in China -- and worldwide -- are likely to see demand drying up in China's once-lucrative market that dominated global demand. That doesn't bode well for the sector in coming years.
But consumption doesn't have to rely on government-run enterprises like Chinalco and Baosteel. With China's urbanization already well underway and a rising middle class eager to buy, a more open business climate -- if Beijing's speech on Wednesday comes to fruition in coming years -- will help multinational firms compete better in this market. Nestle (NSRGY -1.55%) has certainly embraced that plan, as the company opened two factories in China this year at a cost of nearly $500 million.
That happened even despite Beijing's investigation into Nestle and its baby-formula rivals in the country as part of the nation's sweeping corruption probes this year. It's been worth the cost for Nestle as the infant-nutrition industry has exploded in China and other emerging markets, but if the government wants to rise to the top of the world's economies, it'll need to allow more room for businesses to operate with some flexibility and without fear of sudden reprisal from Beijing.
Is China back? Not yet, no. But the country's ambitions of a more open and business-friendly economy are good signs for long-term investors buying in on China's dip this year. Only time will tell on whether or not Beijing stands by its pledges to create a more efficient economy, but if it does, this global leader could be a long-term play like no other for forward-thinking investors.
