Investors have to be growing concerned, and it’s not just the manufacturing sector: Hong Kong’s Hang Seng has plunged more than 10% for the year with China’s slowing economy. It’s been one of the world’s worst-performing stock indices in 2013, performing even worse than those of recession-plagued economies such as Spain and France.
Manufacturers and industrial firms are front and center in the retreat, however, and it’s Chinese materials stocks that may be the worst bets for China investors right now.
Output at Chinese manufacturers is declining and stockpiles of goods are increasing, according to HSBC’s PMI reading. The combination is a storm of weak demand and oversupply for firms such as leading aluminum producer Chinalco, which is already in a rut with the fall of aluminum prices around the world and global demand still weak. Chinalco slowed production recently to deal with falling demand, but with China representing around 45% of the world’s demand for the metal last year, falling demand in the world’s second-largest economy is a killer blow to Chinalco and other powers in the industry. Until Chinese manufacturing can post a significant bounce-back, aluminum and other metals providers will be under serious pressure.
China’s nascent energy sector’s also hurting between manufacturing’s fall and weak exports. Chinese diesel exports declined to their weakest in seven months in May, and China’s Xinhua News Agency sees Chinese domestic diesel demand falling further in the current quarter to match falling prices. That’s not good news for Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), one of the world’s largest companies and China’s leading oil giant. While Sinopec’s about as safe a stock as you can imagine in China — it’s the fifth-largest oil company in the world and has engaged in multiple deals with foreign oil giants in exploration and other activities — the firm’s shares could take a hit if domestic demand and prices continue to slump.
Chinese manufacturing and materials stocks may not be the only picks in trouble, however. Leading international manufacturers could see demand in the world’s second-largest economy, cutting into lofty growth expectations that relied upon China’s surge to make up for weakness elsewhere around the globe. Japanese industrial power Komatsu Ltd (ADR) (OTCBB:KMTUY), the second-largest industrial machinery manufacturer in the world, is betting on growing Chinese demand this fiscal year, in combination with the weak yen, to fuel growth.
The latter’s been a solid bet so far, but the former remains elusive. Komatsu’s had a tough time growing sales in China in recent quarters despite its position as the top manufacturer in the country, and with Chinese manufacturing on the downswing, that trend could continue. It may not affect the company’s bottom line too heavily if the yen continues to weaken, but Komatsu’s sales may not live up to the company’s hopes.
Optimism remains elusive
It’s important to note that China’s economy is still growing far faster than most. With the kind of hype and optimism that surrounded this country’s rise, however, China’s 7.7% growth rate it posted in the first quarter won’t live up to expectations — and could slow even more in the near future. Sinopec and other well-entrenched Chinese firms may be able to live up to their shareholders’ expectations through their international exposure and size, but use caution: China’s manufacturing slump, cash outflows, and slowing growth may be just the beginning for investors’ headaches.
Chinese manufacturing’s slump has harkened in the end of the “Made-in-China” era. Could an even bigger blow to the world’s second-largest economy be on the way? The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it’s “the next trillion dollar industry.” And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day.
The article China’s Growth Engine Goes Cold originally appeared on Fool.com.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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