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By Jeremy Glaser and Daniel Rohr, CFA | 11-08-2012 03:00 PM

A Cure for China's Hangover

Investors looking to avoid the pain of China's slowdown should keep a close watch on consumer-oriented stocks, says Morningstar's Dan Rohr.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. We are hearing a lot about a slowdown in Chinese growth, but just how steep will this slowdown be and what's the composition of it? I'm here with Dan Rohr. He is an analyst at Morningstar, and he has looked very closely at this issue.

Dan, thanks for talking with me.

Daniel Rohr: My pleasure, Jeremy.

Glaser: So, certainly there does seem to be a consensus building that these previous levels of Chinese growth just weren't sustainable and that we're moving into a period of slower growth. But there is a lot of discussion about whether that's going to happen very rapidly and very suddenly or if it's going to be more subdued over long period of time. What's your view? Where do you see Chinese growth during the next, say, five to 10 years?

Rohr: Without question we've seen Chinese GDP growth slow considerably over the past several quarters; so, in the third quarter, it's running at 7.4%, if you trust the official government numbers. And that's down from an average of roughly 10% over the past 30 years. So, no question China has slowed.

There are a lot of metaphors that get tossed out in an effort to frame the discussion, to describe the nature of the slowdown. So, you hear the hard landing versus soft landing debate. Maybe this is just a bump in the road or just growing pains. I think emerging consensus on the matter is what we're looking at here is a soft landing, and then an acceleration up to roughly 8.5%. So, I'd like to say it would seem that 8.5% is the new 10%. And implicit in that consensus view is that the slowdown we're seeing is a cyclical phenomenon. I would tend to think that the nature of the slowdown is more structural than cyclical. And as a result, the long-term growth trajectory from here on out is going to be quite a bit lower than that 8.5% number that seems to be consensus.

So, if I were to pick my metaphor, it wouldn't be the hard landing, soft landing or bump in the road--it would be a hangover. And the message here, I think, is that what we're looking at, the nature of the slowdown, now is a function directly of this credit-fueled investment binge that we've seen over the past decade.

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