Monday, 25 July 2011

Are the first cracks in China starting to appear?

China in recent years has been the country that has underpinned much of the economic growth around the world. It's seemingly unstoppable growth has led to one of the biggest commodity booms ever seen. The demand out of China probably saved several commodity driven countries from really feeling the impact of the GFC (notably Australia and Canada).

Most of what we hear from China continues to paint this rosy picture - with growth still forecast at levels that the developed world could only dream of. However recently some factors have caused me to re-think the China growth story (and importantly what my asset allocation should be)
  1. I was recently in Hong Kong and got the South China Morning Post delivered to my room. Out of general curiosity I browsed the newspaper and was mildly shocked to see the number of articles dealing with failing factories in the manufacturing heart of China. These factors have been failing due to several factors including rising wages and rising rents
  2. Getting accurate data out of China is notoriously difficult. The propoganda and government controls make it had to seperate fact from fiction.
  3. Many factories in China cater exclusively for the U.S. With the problems the US is having at the moment how is the Chinese manufacturing sector going to survive?
  4. China's projected growth is already factored into the stock prices of many entities so there is only downside risk inherent in companies that have a significant exposure to China.

The dilemma in the above is finding stocks (especially global blue chip companies) that are not in some way dependant in China even through several degrees of separation.

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