A slowdown in the world’s factory could be a good time to take a bet on the workers.
Growth in China’s economy decelerated to 7.6 percent year-on-year in the second quarter of 2012, the lowest since the start of 2009. The old mainstays – exports and investment – both disappointed. The share of investment in growth fell relative to 2011, and slowing exports were a drag.
The last time things were this bad was the financial crisis, and Beijing responded with a mighty stimulus. An increase in lending of more than 5.5 trillion yuan ($861 billion) in 2009 was equivalent to around 16 percent of gross domestic product, dwarfing the U.S and European stimulus. Anyone betting on China’s equity markets, which rose 88 percent from end-2008 to August 2009, made a killing. Hard commodities also benefited, with the price of copper more than doubling over the course of the year.
This time it’s different. The 2009 stimulus did the job, but it also ballooned total credit levels from around 134 percent of gross domestic product in 2008 to 173 percent in 2011, unleashed a wave of inflation, and tilted the economy further toward reliance on investment to drive growth.
A repeat performance isn’t in prospect. The 2012 stimulus is markedly smaller and pays more attention to solving, or at least not exacerbating, structural problems. Rate cuts have been executed so they protect returns to household savers even as they cut the cost of credit for business borrowers. Income tax for low earners has been reduced.
Worryingly, the more modest moves to stimulate growth aren’t yet gaining traction. June’s bank loans rose to 919 billion yuan, up from 793 billion yuan in May. But the medium- and long-term loans that are used to fund investment projects actually fell, pointing to anemic business confidence.
With the government in no rush to flood the markets with liquidity, and business reluctant to start another round of investment, the chance of the 2012 mini-stimulus putting a rocket under equity and hard commodity markets is remote. Instead, the slowdown could be a chance for China’s consumer to step forward – shopping bag in hand – to pick up the slack from fading investment and exports.
In an otherwise gloomy set of second-quarter data, household income and consumption were among the few bright spots. Adjusted for inflation, urban disposable income grew 9.7 percent in the first half, outpacing GDP growth. The share of consumption in overall growth was 57.7 percent, compared with 47.5 percent in the first half of 2011.
Of course, a general slowdown coupled with weaker asset prices will be a headwind for consumers. But as the economy overall shifts toward consumption, higher incomes should mean bets on the Chinese household wallet pay off. Agricultural commodities like soybeans and corn should continue to benefit. China’s per-capita consumption of meat and poultry is less than half that in the US and 70 percent of the levels in Taiwan, whose citizens have similar tastes but bigger wallets than their mainland cousins.
Firms like Yum Brands, YUM +2.50 percent whose KFC and Pizza Hut restaurants saw 50 percent of 2011 operating profit come from China compared with 32 percent from the US, are well placed to benefit. Internet firms like Baidu – China’s Google GOOG +1.06 percent – that gain most of their revenue from advertising are essentially plays on rising incomes and consumption. Shares in both have tumbled from their recent peaks, partly on concerns about China’s slowdown.
In the boom years for China’s economy, a bet on the commodities that fueled investment and the ships that transported exports was the best way to benefit. Now growth is slowing but incomes are rising, and it’s time to go shopping with the Chinese consumer.