Knowing China And Its Economy

The National Bureau of Statistics of China just published a very thorough summary of what the Chinese economy achieved over the year 2011. Those wanting to get a bit acquainted with this admittedly static picture could do worse than read it from top to bottom.

This document has many interesting tidbits. I'll go over a few, together with possible consequences.

China obviously had another bountiful year in 2011

Almost every other statistic shows growth, growth, growth. It's almost impossible not to be impressed at how fast China is growing, even after reaching its present tremendous size in terms of material production. This is something that's sometimes not well known in the western developed world, something that has led me to write my article "In Steel, India Is Not A Factor."

Inflation in China during 2011 meant food

Food was clearly the category pushing the Chinese CPI forward during 2011. This can't sit well with the political establishment, since food is also a large part of the typical Chinese consumer's consumption basket, and one of the things that can clearly lead to political unrest. Such could make the Chinese authorities more careful with controlling inflation than they otherwise would be. It will also push for greater wage demands, something that was seen frequently during 2011.

Also relevant, from now onwards with China displaying visible inflation (CPI growing at 4.5% yoy right now), having an appreciating yuan and being the producer of the world, the U.S. and Europe will be importing Chinese cost inflation.

Housing is already on the way down

2011 saw the top on the Chinese residential real estate bubble. Since October, and continuing into 2012, residential prices have been going down in more and more Chinese cities, to the point where during January 2012 not a single city (of the 70 largest) saw rising prices. This chart shows this trend quite well.

This new trend is the reason why I expect lowered construction activity, and thus, lower demand for most basic materials associated with residential construction. Since this sector is so large, I expect a worldwide impact from it, which should be particularly vicious in iron ore (but should also hit steel, copper and other construction materials).

The production is sometimes mind-boggling

China produced 1.13 billion mobile phones during 2011. It also produced 320 million PCs and 100 million LCD TVs. The numbers are just massive and show that for all purposes, China is now the "producer of the world."

Several developments are negative for worldwide steel prices

Spread across the data one can find several developments that will eventually impact worldwide steel prices. Namely, China's production of rolled steel is progressing faster than that of crude steel (so it's slowly going up the ladder in added value). China's exports of steel, though still small (5.5% of production), grew at a 14.9% clip over 2010, whereas imports fell 5.2% in volume. I'd expect this trend toward larger steel exports to become more pronounced as internal demand for steel becomes weaker.

These developments are a concern for the U.S. steel industry, as represented by the Market Vectors Steel ETF (SLX).

Fixed telephony is going obsolete even in China

Another interesting tidbit is confirming how even in an emerging market growing so fast, fixed telephony continues to show decreases in the number of landlines in operation. This is a huge warning sign for every investor in telecoms that are too exposed to fixed-line telephony.

That this trend can be so strong in China means that it will be even more pronounced in a developed market like the U.S. Yet, it's not easy to play this theme through a sector ETF, as the telecom ETFs - Vanguard Telecommunication Services ETF (VOX), iShares Dow Jones US Telecommunications Sector ETF (IYZ) - also include mobile operators. This means that to avoid this trend you have to avoid or short specific equities, like Windstream (WIN) or Frontier Communications (FTR).

Where China doesn't grow faster

Also interesting, there's something where China doesn't show faster growth than the U.S.: Population. China's natural growth rate came to 4.79 per thousand, with the U.S. showing a natural growth rate that's similar at 4.98 per thousand, during 2010.

And much more …

Again, I can only emphasize how interesting and useful this document can be and recommend everyone with the time and interest, to read it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.