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GlaxoSmithKline plc (ADR) (GSK), Abbott Laboratories (ABT): China’s Murky Business Climate Won’t Clear Up Soon

A strong week for investors ended especially well in China, as Hong Kong’s HANG SENG INDEX (INDEXHANGSENG:HSI) index jumped by 3.3% for the week. The gains came despite a topsy-turvy Wednesday, when a trading error sent China’s benchmark index tumbling and surging during the morning period. It was the latest headache for investors in the world’s second-largest economy this year, even as the Hang Seng has picked up more than 5% over the past month, helping to ease the index’s year-to-date losses.

Will Chinese stocks recover by the year’s end? Let’s dive into what’s happening in the world’s hottest emerging market.

The credit crunch hits home
China’s economic slowdown from its double-digit percentage annual growth just a few years ago continues to haunt the nation’s businesses. The Chinese financial sector has been particularly hard hit as Beijing lets the shadow banking industry fall on its own merits, drying up easy credit. Even steady and strong banks in the country have taken a blow, however: China Merchants Bank announced this week that its first-half net profit grew 12%, far less than it had advanced a year ago.

Jim Chanos on china map

That’s still a much better number than many financial institutions across the world are witnessing, but the sun is setting on lofty growth predictions that once touted China as an imminent economic colossus. A fantastic piece from the New York Times outlines how the ongoing credit crunch has led to some businesses across the country wilting. Fast growth once dominated in China, but the country — and investors — will have to adapt to a slower growth climate in the coming years.

That will mean new, tempered expectations that stick closer to the basics — investing in strong, solid businesses — and less gambling on explosive potential.

Even international businesses in China may have to take note of the country’s changing business atmosphere — although not for the same reason. Beijing is reportedly expanding its probe of price-fixing behavior in the country’s various industries after already going after numerous health-care firms. GlaxoSmithKline plc (ADR) (NYSE:GSK)‘s well-publicized bribery allegations could impact the company and stock in future quarters.

The company already announced at its most recent earnings release that the ongoing probe could hit earnings in the future, even as GSK’s China sales jumped 14%. The firm — and other leading Big Pharma giants — can’t afford to slip up in this growing market, especially as China vies to become the second-largest pharmaceutical market in the near future.

Abbott Laboratories (NYSE:ABT) has also felt the heat from China’s probes, as Chinese regulators investigated pricing structures in the country’s infant-nutrition industry. Nutrition’s become a key part of Abbott’s post-pharmaceuticals life — it’s Abbott’s largest segment by sales, and grew strongly in the most recent quarter. Considering China’s intense demand for baby formula, Abbott investors need to hope that the government’s forced recall of some products, and subsequent fine, doesn’t grow into something even worse.

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