China’s economic growth has been a source of controversy in recent years.
Critics characterize the Chinese economic boom as nothing more than a credit-fuelled bubble, one destined to burst with disastrous consequences. In contrast, supporters see the country in the midst of a great transformation, on its way to becoming the world’s next superpower.
More evidence came out in favor of the bears overnight Tuesday. HSBC’s China flash PMI fell to an 11-month low, coming in at 47.7 for July. The reading measures the health of China’s manufacturing sector.
If China’s economy is in trouble, many US-listed companies could be exposed. In particular, Caterpillar Inc. (NYSE:CAT), General Motors Company (NYSE:GM) and Southern Copper Corp (NYSE:SCCO) could disappoint investors.
Signs China’s economy is slowing down
About two years ago, famed economist Nouriel Roubini warned that the Chinese economy was due for a “hard landing” in the second half of 2013. Observing China’s enormous fixed investment, Roubini argued that China’s economic expansion was unsustainable.
Increasingly, it’s looking like Roubini may have been onto something. The bad PMI print is just the latest in a series of negative reports. In June, China’s official GDP report showed that the country’s economy grew just 7.5%. Earlier in July, Chinese trade data showed that both exports and imports contracted at a rate much worse than anticipated.
Caterpillar is dependent on the mining industry
Short seller Jim Chanos has been an outspoken critic of China’s economy. He’s been short the Chinese property developers, arguing that there’s a dangerous real estate bubble in China.
But last week, Chanos turned his focus to an American company, targeting Caterpillar Inc. (NYSE:CAT) in a presentation at CNBC’s Delivering Alpha Conference.
Caterpillar Inc. (NYSE:CAT) is a tertiary play on Chinese economic growth. Half of its operating profits come from mining companies, which has been to Caterpillar’s benefit in recent years. The market for commodities has been in a sustained bull run, largely due to China’s infrastructure build out.
But if China’s economy struggles, the commodities market should likewise suffer. That would put pressure on the mining industry as a whole, and therefore on Caterpillar Inc. (NYSE:CAT).
General Motors sees China as a key growth region
It wouldn’t be fair to characterize American auto giant General Motors Company (NYSE:GM) as a play on China. The company still depends mostly on North America, and gets revenue from nearly all corners of the globe.
Still, General Motors Company (NYSE:GM) has been looking to China for its growth. In its most recent 10-K, GM writes that “maintaining a strong position in the Chinese market is a key component of our global growth strategy.” The company dedicates an entire section to China, noting how important it is to GM.
General Motors Company (NYSE:GM) has been successful in China, increasing its market share in the country for the last three years. As a percentage of total revenue, China brings in about one-fifth.
A Chinese economic collapse would not necessarily decimate General Motors Company (NYSE:GM)’s business — shares of rival Ford Motor Company (NYSE:F) have held up pretty well in recent years despite its large exposure to the European market.
But investing in General Motors Company (NYSE:GM) isn’t as a simple as noting the average age of a car on America’s roads.