Cramer Likes Joy Because China Is “Turning Up”

Mad Money

Mad Money (Photo credit: Wikipedia)

Mad Money’s Jim Cramer likes Joy Global, Inc. (NYSE: JOY) and rates the company a “Buy.” Why? In Cramer’s view, China is at the bottom of its economic cycle and is turning up. Therefore, the world’s second-largest economy will need more coal to make the electricity to power its growth, and with it, the type of mining equipment made by Joy.

Cramer’s comments, which he made last Friday on CNBC’s Squawk Box, represent a bit of a change in tune for the popular Wall Street commentator. As recently as June, Cramer said in an interview that he believed that China would only grow at 6 percent this year, fine for most economies, but terrible in his opinion for China. Why the change of heart? Cramer cited trends in electricity consumption as the reason for his optimism.

While I agree with Cramer’s conclusion, I don’t necessarily agree with his rationale. When China’s economy was much simpler, and heavy industry was a key driver of the country’s growth, electricity demand was seen as a proxy for the overall growth of the economy. This may no longer be as valid as it once was, though, because China’s economy is in transition. Heavy industry, which is a prodigious user of electricity, is no longer playing the role it once did, and light manufacturing and the services sector, which use much less power, are on the rise.

Nonetheless, there are plenty of other economic indicators that suggest that Cramer may be on to something. For example, August sales of passenger cars rose at a healthy year on year 12.1 percent rate, an acceleration of growth from the 10.7 percent registered in July. Many analysts expect strong growth in passenger car sales throughout the second half of the year. Moreover, the most expensive cars are the cars that are selling the fastest in China.

Sales of the local luxury brands increased by 18.8 percent in August, hardly the sign of a weak economy. China’s housing sector is also showing signs of strength. New home sales have been picking up for several months, and that trend continued in August, with sales, as measured in square meters, up 13.3 percent year on year, after a 14.5 percent rise in July.  That ended a run of nine consecutive months of negative year-on-year sales numbers.

Also, the average price of housing in 100 major Chinese cities rose in August for the third straight month, indicating that the decline in property prices appears to have bottomed out. A survey of property developers and real-estate firms showed the average price of housing in August was 8,738yuan ($1,386) per square meter, rising 0.24 percent from 8,717 yuan ($1,383) per square meter in July. Housing prices rose in 63 cities and fell in 37in August from the preceding month, the survey showed.

Meanwhile, inflation remains well under control. China’s consumer price index (CPI) ticked up a bit to 2 percent in August, but at a year to date rate of increase of just 2.9 percent, and many analysts expecting full year CPI to come in at 3 percent or below, low inflation gives government policy makers plenty of room in which to maneuver.

Autos and housing are two of the largest items of consumption in any economy. Those who doubt that China is making the transition to an economy that is led by domestic consumption, rather than exports and government spending, should look closely at the recent data. China is the world’s biggest consumption story, and the growth of the country’s own domestic markets will provide sustainable growth for many years to come.

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