to Play China’s Hard Landing
Like it or not, China’s economy is
slowing. Whether or not it’s a sharp dramatic downturn
or slow deterioration in growth is certainly up for debate. In
either case, China’s slowing imports (and
exports) will have potential domino effects across much of the world,
Europe and the U.S. being susceptible at an already fragile time in all
The most recent data is pointing more
towards the former and
even if the communist country is able stave off a serious decline in
or worse contraction, I think most will agree that there will be
companies that will suffer even in a normal decline.
As the world’s second largest economy, China has quite a bit of clout
it comes to fueling or smothering global trends. They are
also the world’s most inhabited
nation dwarfing the US populous by over 1 billion people (est).
The social trends of 1.35 billion people can
have serious influence on everything from the prices of food, goods and
technology to the profits of major corporations.
China’s recent growth and social
evolution has especially
driven demand and prices of commodities from corn to steel.
They have also been a bullish catalyst for the
production and prices of electrical, mechanical and farming machinery
In many instances, their immense
consumption expansion has
had a compounding effect of sorts; first
driving the price of commodities like corn higher, which in turn
profitable crops for farmers here in the U.S., motivating them to buy
efficient equipment, equating to a positive earnings effect
on companies like
Caterpillar, Bunge, Monsanto and more.
As growth slows and demand wanes,
prices of the goods and
commodities that China consumes are likely to see a price reduction.
This is where you may be able to profit.
China has over 300 million farmers and ranks #1 in worldwide
farm output. They grow all sorts of
crops from rice and wheat to potatoes, tea, cotton and more.
Output of all of their major crops has risen
in the past 20 years and more recently fruits, meats and grains have
China does have a problem with water
for its crops and
according to several sources is in danger of depleting clean water from
for crops but also the pollution caused by farming. Solutions
are more efficient farming
techniques and equipment as well as an increase in imports of food.
China’s changing appetite for
proteins has had dramatic
effects on their meat and grain consumption, but if the country were to
into recession, that demand would quickly dry up and force commodity
A way to play this would be to short
or buy puts on the Market
Vectors Agribusiness ETF – (MOO - ETF report).
gives you exposure to a plethora of agriculture related companies like
Much of oil’s recent run-up is due to potential supply issues
and has little or nothing to do with demand.
If China were to experience a hard landing, there is a good chance we
would see both West Texas and Brent Crude take a hit. Even an
orderly slowdown in the world's most poplulated country would help push
oil prices lower.
To play oil to the downside, you
could short or buy puts in
the US Oil Fund ETF (USO - ETF report).
USO is not an
investment that you want to hold long for a while due to its negative
roll yield. This negative roll yield is
caused by a normal “contango” in oil futures, where longer dated
more than short term futures. Taking a
short position in the USO is just fine.
According to the Financial Times, China’s demand for steel
has soared over the past decade, with annual growth averaging 15%,
accounts for more than 40% of global steel production. They
are also the world’s largest consumer of
iron ore and account for 60% of all the steel traded globally in 2011.
Just last year China saw steel demand
growth drop to 8% and
many analysts are expecting more dramatic slowdowns to be announced.
A dip in Chinese consumption would not only adversely
affect steelmakers and miners like ArcelorMittal
(MT - Analyst Report)
and BHP Billiton (BHP - Analyst Report),
but also the coke
and coal miners
like AK Steel (AKS)
and others (several of the producers like MT and X also have
coke plants) who supply the steelmakers
The reality is that all these
industries have been preparing
as best they can for China’s growth to slow, but if China experiences
landing that many experts believe is likely, the preparation will only
the inevitable reduction in profit for these companies.
A Levy is the Momentum Stock
Strategist for Zacks.com. He is also the Editor in charge of the
Whisper Trader Service.