Hard landing

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Bears in the China Shop — Investors Should Avoid Asia

China hasn’t had a good run lately, and judging by recent data it’s not going to get any better. So investors who haven’t yet bailed out of Asia should seriously consider pulling the trigger now, even if they are sitting on losses.

Here’s why:

The admittedly apocalyptic Tyler Durden over at Zero Hedge has a great post about liquidity issues in China’s financial system right now. As he writes, overnight repurchase rates are at record highs, pushing 25%. This is equivalent to the surge in LIBOR or the TED spread during the financial crisis, where institutions start charging big premiums to lend to each other, even for just a single day. Not an encouraging sign. Check out the accompanying chart.

ChinaRepurchase

At the same time a lack of confidence grips the financial system, manufacturing — still the backbone of the Chinese economy — remains in a tailspin. The HSBC flash PMI, or purchasing managers index, for June indicates a nine-month low for manufacturers in China. A few months ago there were hopes of a recovery, as this chart from Markit Economics shows, but the weakening as of late shows that it might have been just a head fake and that the declines will continue.

ChinaPMI

The SSE Composite Index, Shanghai’s flagship index akin to the Dow Jones Industrial Average or S&P 500, has lost about 10% in a month and its major components have been flattened. Here’s a rundown:

  • PetroChina (PTR): -19% in the last month and -28% YTD
  • Sinopec (SNP): -19% in the last month and -22% YTD
  • China Life (LFC): -17% in the last month and -29% YTD
  • Aluminum Corp. of China (ACH): -24% in the last month and -34% YTD
  • China Unicom (CHU): -15% in the last month and -21% YTD

China is in deep trouble, and these latest numbers are more proof of that.

The biggest question facing investors then is not whether to bottom fish in China or its neighbors, but how to insulate themselves from the trouble in the region. Given the crash in commodities due to the slowdown in China, it seems prudent to avoid materials stocks for the time being thanks to cratering Asia demand.

Let’s hope the slowdown of China’s growth engine stays contained to sectors like this, however, and doesn’t bleed into global consumer and technology markets.

If that happens, we could see significant trouble for all corners of the market across the next several months.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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