Everyone loves to ride a hot trend, but in too many cases,
the hysteria is much bigger than deserved.
When it comes to hot trends, it's hard to come up with a
hotter one than
Chinese stocks. But as I see it, the "invest in China"
craze has reached irrational proportions, and it's time to
start paring any picks specifically intended to capitalize on
the Far East's alleged surge in consumerism.
The rest of the story
It's hard to argue that China hasn't been an
investment-worthy spot in recent months. The country's nearly
$600 billion in
government stimulusoccurred almost entirely in the first
half of the year, and the Chinese economy has responded
quickly. China's annualized gross domestic product growth
during the second quarter rolled in at 7.9%, topping previous
estimates of 6.1% by a wide margin.
The fiscal strength trickled into stock prices, too. The
Shanghai Composite has risen 65% so far this year, handily
beating results in the U.S. and most of the rest of the
world.
Yet to understand China, you have to look beyond
government spending and stock prices to the underlying
economy. Take a look at some of the data suggesting China's
consumers aren't faring as well as the country's
industries:
strongly urging them to lend. In the first half of the
year,
lending was up 28%to more than $1 trillion, but does
higher lending make sense with high unemployment? Keep
reading ...
The People's Bank of China recently said nearly 5
billion yuan (about 730 million U.S. dollars) in credit
card debt was more than 60 days late for the first half of
2009, an increase of 133% from the year-ago period.
Those are hardly signs of healthy Chinese consumers.
Tightened purse strings
I don't want to imply that tepid consumerism in China
is a permanent condition. It's simply a condition that hasn't
gotten better yet, and I don't see any real catalyst on the
horizon to improve things.
For instance, look at
Yum! Brands (NYSE: YUM) and its recent
results. Its China division posted an 8% increase in revenue
last quarter thanks to new store openings, but same-store
sales in China were actually lower by about 4%. That's not
good news, given that China accounts for more than 30% of the
company's revenue. Profits and margins have held up well thus
far, but it's uncertain whether the company's big investment
will keep paying off as an influx of outside investment
saturates the consumer market.
Yet companies continue to invest in China.
Coca-Cola (NYSE: KO) has accelerated its
Chinese investments with a $2 billion initiative to build new
bottling facilities and make Coke products more available.
Last year,
PepsiCo (NYSE: PEP) announced a similar $1
billion investment program in the country over four years.
Yet if the Chinese won't spring for a little fried chicken,
are bottled beverages somehow going to fare better?
The beverage makers aren't alone.
Ford 's (NYSE: F) auto sales in China
rose by 14%in the first half of 2009. But with Chinese
consumers having trouble paying credit cards, can they afford
car loans? Similarly,
Advanced Micro Devices (NYSE: AMD) relies on
China for more than 40% of its revenue, while companies like
Starwood Hotels (NYSE: HOT) and cosmetics
retailer
Elizabeth Arden (Nasdaq: RDEN) both need
consumers to step up and spend. It remains to be seen whether
the investments these companies have made to expand their
presence in China will pay off. Continued... |