Seeing Red

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China Stocks: They’re Still Dead Money

To start the year, China’s median GDP growth forecast was around 8%. Then it slipped into the mid-7% range by spring. And at the end of June, Credit Suisse set a new low-water mark, hinting that China’s GDP growth could start with the number 6 when all is said and done.

That just about sums up the China narrative in 2013 pretty well. And investors thinking that a turnaround is in store should think twice.

Yes, 6% growth is better than the roughly 2% growth we are hoping for in the U.S. But it’s all about high expectations and slowing momentum — a one-two punch that will keep China investments depressed for some time.

On Wednesday, Chinese trade data for June was weaker than Wall Street expected and validates the slowdown we’ve seen in slowing manufacturing data. Clearly the negativity isn’t on the wane.

Broad-based China funds have taken it on the chin, like the iShares China Large-Cap ETF (FXI) that is off about 17% since Jan. 1. Megacaps including China Mobile (CHL), China Life Insurance (LFC) and CNOOC (CEO) are all down 10% to 20% in the same time frame, too.

And it’s not just Chinese equities, either.

Yum! Brands (YUM) just reported a Q2 sales dive and a decline in earnings thanks to weakness in China. This doesn’t bode well for multinational stocks betting on consumers there.

McDonald’s (MCD) has also seen softness in China, too, that could weigh on results. The fact that headwinds persist despite opening 250 stores last year and plans to open another 300 across 2013 is noteworthy.

These trends should make you think twice about chasing the China miracle.

For instance, a lot of people like to throw around the fact that only about 6% of Chinese own a car while 80% of Americans do — and extrapolate that into some mega-growth story for General Motors (GM) and Ford (F) as they push into China. But remember: Auto sales in China rose just 4.3% year-on-year in 2012. So much for the growth miracle last year. Investors who forget this might pay the price in the months ahead if auto sales there continue to suffer.

Throw in the recent uncertainty in the Chinese financial sector, a risk of policy tightening in Beijing, an apparent housing bubble, a declining labor force thanks to the demographics of the long-standing “one-child policy” and other challenges … and it’s safe to say that China is in trouble.

So beware of oversimplifying things. Growth is not always a good thing, especially when previous growth rates were much higher and expectations have not adjusted accordingly.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at 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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