It is the Year of the Ox, but if you are counting on a 2009 China recovery to drive your portfolio, uplift the commodities market, and haul the global economy back into healthy pastures, you may be setting yourself up for a fall from the cart.
My analysis of recent data points regarding China's growth indicates an overall landscape of continued economic and market risk, even in light of the well-publicized stimulus plan. That said, I do see bright spots, but certainly not in the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) exchange-traded fund.
China primer
First, a few basic economic facts. According to World Bank figures, roughly 40% of China's GDP comes from exports, and the United States, at 20% of exports, is a big customer. As you likely have heard, members of the Chinese middle class do a good job of squirreling away their income. The personal savings rate runs a staggeringly high 20% (this differs from the official savings rate, which is much higher because it is based on national output and includes exports and corporate savings).
But those heaps of stashed-away yuan do not exactly represent a coiled spring of Chinese consumerism ready to leap into action. In lieu of strong social support from the government, the middle class accords about 39% of their savings to education and health-care expenses. In fact, a World Health Organization study reported that individual out-of-pocket medical expenses amounted to 49% of the country's total health expenditures in 2006.
So, on a global scale, China's growth is tethered to the world's appetite for exports, and on the domestic front, structural issues that hail from the top limit the consumer economy. You don't have to be a Fool with a capital "F" to recognize this economic profile as a downer for China's Facebook status.
And the current economic data is ...
In a phrase, not all that good. As you may know, the International Monetary Fund recently revised downward its 2009 world economic forecast. Global growth is now expected to come in at a meek 0.5%, and China's prospects have been cut from 8.5% growth to 6.7%. Private financial institutions echo sentiments in that range. As for Nouriel Roubini's graveyard China forecast, suffice it to say that it includes the "R" word.
Sources within China corroborate the negative outlook. An official at China's National Energy Administration remarked in early December (after the November 2008 announcement of the 4 trillion yuan stimulus package) that the country could be facing an energy glut within the next two years. That doesn't bode well for shares of Yazhou Coal Mining (NYSE:YZC) or Huaneng Power (NYSE:HNP), and even casts a shadow on the growth outlook for global coal behemoth Peabody Energy (NYSE:BTU). Moreover, China Daily has reported an estimate that every 1% drop in U.S. and European GDP translates into a whopping 4.75% hit to Chinese exports. Darn!
The good news
Yes, I do see improved conditions down the road. The Chinese government is about to implement the second tranche of its stimulus package, and this round is reported to include 17 billion yuan on health and education. What's more, an additional 850 billion yuan spending package, focused exclusively on providing health care to 90% of China's citizens by 2011, was recently given the green light. Combined with reduced interest rates and home down payment minimums, the government seems to be setting the stage for a genuine structural shift in China's economy.
That does not mean that you should rush to buy a China consumer name such as China Mobile (NYSE:CHL). Frankly, I think that it is too soon to bet on a major economic bounce-back.
There are, however, smaller names that I see thriving throughout the downturn, regardless of how long it lasts. For instance, I view New Oriental Education & Technology (NYSE:EDU) as the Chinese corollary to U.S.-based outperformer Apollo Group (NASDAQ:APOL). The company should continue to benefit from the long-run Chinese trend toward increased education. The fact that the Chinese government has included education spending in its stimulus package is an added benefit to New Oriental, but, importantly, the company's success does not depend on the political mood.
If you're eager to get some China exposure, but wary of 2009's Ox goring your stock portfolio, I'd also encourage you to try out the Motley Fool Global Gains newsletter service. The Global Gains team stays on top of economic trends in China and across the globe, and you can try out the service free for 30 days.
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