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

What country does this describe?

The country’s banks are short of capital and will have to go to the financial markets to raise more in 2012—and 2013.

Bank balance sheets have ballooned as a result of lending to real estate developers.

Everyone believes that banks’ official accounts badly understate the number of bad loans on their books.

And, finally, it’s just about impossible in this country to separate bank and government finances.

Spain and Italy? Of course. And you can work your way around Europe adding other names to your list of guesses.

But the country I had in mind was China. China’s banking problem isn’t as far along as that in Europe. Notice that I’m calling it a “problem” rather than a “crisis.” But China’s banking sector is headed toward a crisis—and the government’s efforts to head off that escalation will be one of the major drivers in China’s economic and monetary policy in 2012 and 2013. Want to understand how much stimulus Beijing will pour on its economy—and therefore whether you should be putting money into Chinese stocks or taking it out (and when)?  Take a long look at China’s banks.

If you understand the nature of China’s banking problem, you’ll understand why I believe that China’s government will move sooner rather than later and more aggressively rather than more moderately to stimulate China’s economy. In the short run, China simply can’t afford to let a slowing economy make the problems in its banking sector worse. In the long run? Ahh, a very different question with a much more worrying answer.

Let’s start with the strangest manifestation of the problems in the sector, the need of China’ banks to raise a huge amount of capital. Read more

Sometimes you can’t tell the players in China even with a scorecard.

In recent stories about the extraordinary fall of Bo Xilai, Communist party secretary of Chongqing, a city of 32 million, from a position as a frontrunner for one of the nine slots on the Standing Committee of the Politburo that runs China to house arrest, I’ve seen him called a conservative, a liberal, a reactionary, a progressive, a populist, and a leftist intent on bringing back the Cultural Revolution.

I think most of those characterizations are accurate—even though they position Bo simultaneously at what those of us who live outside of China consider contradictory ends of the political and economic spectrum. In those contradictions, I think, you can find a key to understanding the peculiar current nature of China’s state-run capitalism—and the shape of the coming struggle over the direction of that economy. For an investor in any global market, I don’t think there’s a more important story right now.

Let me explain what has happened in China, the significance of Bo’s fall, and why this is important for investors outside of China. Read more

2012 is the year of the dragon. Because the dragon, the icon of China’s emperors, symbolizes power and wealth, families in China see children born in a dragon year as especially fortunate. Dragon years, historically, produce a mini baby boom with about 5% more children born in a dragon year. Add that to the echo from China’s own baby boom and the loosening of government restrictions on family size and China is projected to see increasing birth rates that peak around 2016.

That’s led to a stock market boost in the shares of companies that are likely to tap into the baby bump. Chinese companies such as Inner Mongolia Yili Industrial Group (baby formula), Hengan International Group (baby diapers), and Boshiwa International Holding (retailer of kids clothes) have been tagged by China-based analysts as beneficiaries of the baby bump.

But I think Mead Johnson Nutrition (MJN) is an even better bet. Read more

It’s early. The results are open to revision and interpretation. And one month doesn’t make an investible trend anymore than a single swallow makes a spring.

But have you noticed? In the last month emerging stock markets such as China and Brazil have outperformed the U.S. market.

And that’s an absolute turnaround from results in 2010 and for most of 2011. Does it mean that we’re about to reverse the pattern that’s held for more than a year and see emerging markets start to outperform developed markets? Well, sort of. The picture right now shows that the outperformance is limited to some emerging markets and even in those markets, so far, the outperformance is spotty.

But I do think there’s the beginning of a trend here that your portfolio needs to respect. And since it’s so early, you need to pay attention to what kind of stocks in these emerging markets investors are willing to buy right now.

Here’s the data.

For the U.S. markets–for 2010 the Standard & Poor’s 500 stock index was up 15.02%. For 2011 to date, as of November 15, the S&P 500 was up 1.65%. In the last three months it gained 5.05% and for the last month 2.85%.

For Brazil—for 2010 the iShares MSCI Brazil Index ETF (EWZ) was up 7.69%. For 2011 to date as of November 15, it was down 19.54%. In the last three months the loss was a more modest 2.80% and in the last month the index climbed 4.35%.

Yep, after trailing for 2010. After getting killed in 2011 to date. After trailing badly over the last three months. In the last month the Brazil index beat the U.S. market.

China shows the same pattern—with some important wrinkles. Read more