The panic of 1873 (and what is often called the Long Depression.) Recessions in 1882 and 1891. The panic of 1893 (with a stock market and bank collapse.). The panic of 1896. The panic of 1907 (with the run on the Knickerbocker Trust building momentum for the creation of the Federal Reserve.)

That’s just a short list of financial and economic crises in the United States during the country’s rise to global economic power in the last half of the 19^th century.

It would be extremely surprising if China didn’t suffer a few bumps on its rise to a similar position of global economic power. And it has. In the aftermath of the 1997 Asian Currency Crisis, for example, China’s official GDP growth rate dropped from 9.3% in 1997 to 7.8% in 1998 and to 7.6% in 1999 before recovering to 8.41% in 2000. The growth rate for China’s exports dropped to 0.5% in 1998 from 20% in 1997.

And now the worry is that China is looking at something like that 1998-1999 growth recession this year or next. Economists outside China are looking for official GDP growth for 2012 of something like 8.1% for the full year and for the economy’s official growth rate to bottom during the second or third quarter at 7% to 7.5%.

Is that worry justified? Could China be headed for a drop to something less than the expected 8.1% growth rate for 2012? Or to something like the dreaded “hard landing,” a vague term that I think means 7% growth or less. Or to something even worse, say, 6%?

Big questions for a country that most predictions show growing to the sky and very quickly. China’s economy is forecast to be larger than that of the United States as early as 2016. Among economists predicting that China will pass the U.S. 2025 is the most distant year I’ve been able to find. So deciding if the current bump in China’s economic path is just a bump or a sign of something more serious that could slow China’s growth rate significantly could be called very important.

The current data is ambiguous, to say the least, and in my opinion points to three possible interpretations of the recent slowdown and its longer-term significance.

No. 1: The Chinese government blew its resources in over-stimulating the Chinese economy after the global economic crisis and now, having stepped too hard on the brakes, doesn’t have the money to stimulate again. That makes this slowdown into more than a bump. Instead it is a major miscalculation with long-term negative consequences for China’s growth

No. 2: The ruling Communist party is immobilized by an internal power struggle and the purge of Bo Xilai, a candidate for the 9-man standing committee of the Politburo that effectively runs China, and the Beijing government is letting a chance to address the slowdown slip away. This too argues that this isn’t a mere bump but another data point on a trend that leads to the erosion of the power of the Communist Party and of the effectiveness of the central government. Again big long-term negative consequences.

No 3. The Chinese government really meant it when it said it wanted to rebalance the economy away from infrastructure investments and export and toward consumer spending and it is willing to risk some growth in order to achieve that end. If China can win this gamble, the country will have earned another stretched of hefty economic growth.

No. 3 strikes me as the most likely alternative—although I can see elements of all three scenarios at work. Let me tell you why I think so and what it means for China as a short- and long-term investment.

None of those growth numbers—8.1%, 7.5%, 7.1, or even 6%–seem like crisis numbers—certainly not enough to send global financial markets into a tizzy until you consider three things. Read more

So far the directional assumption seems to be right, but there are increasing questions about the pace.

The assumption is that the more China’s economy indicates that it is slowing, the more steps Beijing will take to stimulate the economy. The action this weekend indicates that’s still a reasonable assumption.

In data released Friday the government reported that industrial output grew at an annual rate of just 9.3%.  That was the slowest growth rate since April 2009. New bank lending for April, at $108 billion, came in almost 13% below projections and 30% below March levels. Money supply growth, measured by M2, was just 12.8% when economists were looking for 13.3%.

In response to this data—and to the growth rate of China’s economy slipping to 8.1% in the first quarter of 2012 (the fifth consecutive drop in growth)–the People’s Bank cut bank reserve requirements this weekend by another 0.5 percentage points to 20%, effective May 18. It was the third reduction in reserve requirements in six months but the first since the People’s Bank moved in February. A reduction in the reserve ratio of this dimension frees up about $65 billion on bank balance sheets for lending.

But the pace of government moves to stimulate the economy is slower than most, myself included, had expected. After moving aggressively in February, the People’s Bank had been quiet until this weekend’s action. That’s March and April on the sidelines as the economy continued to slow.

One increasingly popular explanation is that the hesitancy on economic policy has been a result of continued turmoil among China’s leadership after the ouster of Chongqing party chief Bo Xilai. That power struggle seems to have claimed another casualty with the sidelining of Zhou Yongkang, China’s chief of domestic security and a Bo supporter on the nine-man standing committee of the Politburo that essentially runs China.

The theory is that without clear direction from the top China’s traditionally cautious bureaucrats are reluctant to take any initiative. And that may be why the People’s Bank, a relatively independent body, has been the first to add more stimulus to the economy.

Whatever the reason a number of banks and economists have moved their estimates for when growth in China’s economy will bottom from the second quarter of 2012 to the third quarter.

Update Home Inns and Hotels (HMIN) on first quarter earnings

I’d call the first quarter report from Home Inns and Hotels Management (HMIN), delivered yesterday after the close of markets in New York, very reassuring. Apparently, the stock market as a whole agrees: as of 2:45 today, the shares are up 5.1%. (Home Inns and Hotels Management is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

The quarter just concluded was indeed as messy as anyone expected. (See my post http://jubakpicks.com/2012/05/09/update-home-inns-and-hotels-hmin-in-my-jubaks-picks-portfolio/  ) China’s largest hotel chain missed earnings projections by 5 cents a share, reporting a loss of 9 cents a share on higher pre-opening costs and the costs of integrating the Motel 168 brand acquired in 2011.

So where’s the reassurance? Read more

Home Inns and Hotels Management (HMIN) has a slight case of indigestion. Or maybe I’d better say two cases of indigestion since the discomfort that investors are probably feeling at the stock’s drop from $31.92 on March 2 to $22.51 at the close on May 8 comes from two different causes.

First, there’s the indigestion that comes from the company’s incredibly rapid expansion in 2011. Home Inns opened 306 new hotels under the Home Inns brand in 2011 and purchased another 307 hotels under the Motel 168 brand when it acquired that company in October 2011. That makes 615 of the 1,426 hotels that the company ended the year with new to the company in 2011. New hotels take a while to build to capacity and integrating an entire new 300-hotel brand doesn’t get accomplished over night.

You could see the effect in Home Inn’s fourth quarter 2011 earnings report. Read more

Buy MGM Resorts International in my Jubak’s Picks portfolio

Before the market open in New York yesterday, MGM Resorts International (MGM) reported a loss of 44 cents a share for the first quarter of 2012. That was much wider than the 15 cents a share loss projected by Wall Street analysts. So it’s not especially surprising that the stock fell down 4.65% yesterday. MGM shares are down another 3.8% today as of 11:30 a.m. New York time on the general decline in U.S. stocks after disappointing April jobs numbers.

On March 20 I wrote a post http://jubakpicks.com/2012/03/20/mgm-resorts-international-mgm-one-for-the-watch-list/ arguing that you should put MGM Resorts on your watch list with a buying target of $13.30 or lower. (That post has more details on the company’s improving debt position.) Well, today the shares are trading at $12.43. That’s sure below $13.30 so as of May 4 I’m buying MGM Resorts International for my Jubak’s Picks portfolio.

Why buy a stock after it misses quarterly earnings estimates? Read more