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4 Dow Stocks to Watch If China's Debt Crisis Explodes

By Dan Caplinger – Mar 16, 2014 at 9:01AM

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Rising economic concerns in the world's second-largest economy have U.S. investors on edge. Find out how China could bring down the Dow and which stocks are most vulnerable.

Investors had to deal with a lot of bad news last week, and as a result, the Dow Jones Industrials (^DJI 1.20%) posted declines on five straight days. Although concerns about the crisis in Crimea clearly weighed on the market, signs of potential trouble in the Chinese economy also weighed on investor sentiment during the week. With the default of solar-cell maker Shanghai Chaori Solar Energy, which was only able to pay about $0.04 on the dollar for an interest payment due earlier this month, fears that an avalanche of debt-ridden Chinese companies could follow suit. With industries including steel, coal, and base metals at risk of joining solar companies because of their high debt loads and suffering from conditions of overcapacity, the fallout could spread across the globe and even affect several companies in the Dow.

Given the industries involved, Caterpillar (CAT 2.46%) is likely at the most risk of suffering long-term damage if conditions in China get worse. The heavy-equipment maker has relied extensively on mining activity in China, and if production of base metals and coal drops, then the need for new capital equipment will drop. Moreover, Chinese companies that become insolvent won't be able to fulfill contractual obligations or follow through on previous orders, and so to the extent that Caterpillar has done business with any of the companies most at risk, the equipment-maker is vulnerable to a short-term revenue drop even in the midst of the terrible conditions it has suffered through for years.

McDonald's (MCD 1.32%) obviously doesn't have direct exposure to the Chinese companies most likely to default, but indirectly, the fast-food giant relies on strength in the nation's economy in order to drive growth. With the fast-food industry in China having endured a massive downturn after an epidemic of avian flu, McDonald's hasn't seen as much growth from its extensive presence in the emerging-market nation as it had hoped to see. The last thing McDonald's needs is a further slowdown in economic activity to make it even more difficult for potential customers to visit its restaurants.

Similarly, Coca-Cola (KO 0.97%) has pinned many of its growth hopes on China. With a stagnant U.S. market, the soft-drink behemoth has made substantial investments in the emerging-market nation, including building new factories over the next three years and adding new products to bolster its list of offerings to consumers in the country. Coca-Cola's long-term strategy depends on continuing gains for middle-class citizens in China and other emerging markets, and further slowdowns for the second-largest economy could thwart those plans.

Finally, watch DuPont (DD), which has exposure to the solar industry through its production of photovoltaic materials. If weaker Chinese solar players disappear, then it could open the door to greater opportunities for DuPont to take advantage of rising demand for solar power within China. Yet from a political standpoint, DuPont could still face substantial obstacles to boosting its Chinese business if the Chinese government seeks to favor its own domestic companies over foreign competition.

Keep your eyes open
Unlike the Crimean situation, there aren't any immediate catalysts that will bring the Chinese crisis to a head. But you'll want to stay aware of what's happening in China to make sure that you know the impact of current events on these stocks and the Dow on the whole.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coca-Cola and McDonald's and has options on Coca-Cola. We Fools don't 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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