In China's dip it's domestic consumer stocks 1 and overseas export stocks 0

11/18/2010 8:30 am EST


Jim Jubak

Founder and Editor,

If you only look at U.S. stocks, the equities markets looked calm yesterday, November 17. The Standard & Poor’s 500, for example, was up 0.02%. The Dow Jones Industrial Average was down 0.1%.

Quite a contrast to the day before, November 16.

But not if you look at commodity stocks in China. These stocks took a beating on  November 16 and took another licking yesterday. The ADRs of Jiangxi Copper (JIXAY) dropped 3.7% on November 16, and instead of stabilizing yesterday dropped even more yesterday, 6.4%. In fact, China’s markets in general were down significantly for the day: The Hang Seng Composite was down 2.4%; the Shanghai Composite dropped 1.9%, and the Shenzhen Composite fell 3.3%.

Why didn’t China’s markets share in the calm?

First, because fears of the imposition of price controls in China in the very near term are hitting the stocks of commodity producers hard. If the government is going to slap price controls on the producers of gasoline, core vegetables (cabbage, potatoes, and cucumbers), natural gas, cooking oil, and sugar, then these companies aren’t going to be able to pass on their own rising costs and profits will take a hit.

And second, because expected measures to tighten the money supply (by some combination of raising the bank reserve requirement again, by restricting loans, and by increasing benchmark interest rates) would hit hard at capital-intensive companies that sell to capital sensitive industries. Jiangxi Copper would see its own cost of capital rise at the same time as customers in the building industry slowed orders because their cost of capital was up and the availability of capital was down.

But what’s interesting to me is that not all Chinese stocks were down yesterday. If commodity and capital intensive stocks such as Jiangxi Copper sold off, shares of commodity and capital un-intensive companies were up—or at worst holding steady.

That’s especially true if what these companies sell lie far outside the limits of any likely scheme of price controls.

Take a look at shares of Baidu (BIDU), China’s leading Internet search provider. Shares were up 3.2% yesterday. Or Home Inns and Hotels Management (HMIN) down just 0.4%. Or International, China’s biggest Internet travel company, up 1.2%.

All three of these companies are commodity light. They sell consumer discretionary goods and services that aren’t likely to see price controls. And they sell to domestic customers rather than to the export market. (For more on why that’s important see my post )

I don’t think these stocks will be immune to a strong correction in the Chinese stock markets. But yesterday’s relative performance is another indicator to me of why you want to add more domestic consumer stocks to your Chinese stock holdings.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter see the fund’s portfolio at )
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