China's Murky Business Climate Won't Clear Up Soon

China's Murky Business Climate Won't Clear Up Soon

A strong week for investors ended especially well in China, as Hong Kong's Hang Seng index jumped by 3.3% for the week. The gains came despite a topsy-turvy Wednesday, when a trading error sent China's benchmark index tumbling and surging during the morning period. It was the latest headache for investors in the world's second-largest economy this year, even as the Hang Seng has picked up more than 5% over the past month, helping to ease the index's year-to-date losses.

Will Chinese stocks recover by the year's end? Let's dive into what's happening in the world's hottest emerging market.

The credit crunch hits home
China's economic slowdown from its double-digit percentage annual growth just a few years ago continues to haunt the nation's businesses. The Chinese financial sector has been particularly hard hit as Beijing lets the shadow banking industry fall on its own merits, drying up easy credit. Even steady and strong banks in the country have taken a blow, however: China Merchants Bank announced this week that its first-half net profit grew 12%, far less than it had advanced a year ago.

That's still a much better number than many financial institutions across the world are witnessing, but the sun is setting on lofty growth predictions that once touted China as an imminent economic colossus. A fantastic piece from the New York Times outlines how the ongoing credit crunch has led to some businesses across the country wilting. Fast growth once dominated in China, but the country -- and investors -- will have to adapt to a slower growth climate in the coming years.

That will mean new, tempered expectations that stick closer to the basics -- investing in strong, solid businesses -- and less gambling on explosive potential.

Even international businesses in China may have to take note of the country's changing business atmosphere -- although not for the same reason. Beijing is reportedly expanding its probe of price-fixing behavior in the country's various industries after already going after numerous health-care firms. GlaxoSmithKline's well-publicized bribery allegations could impact the company and stock in future quarters.

The company already announced at its most recent earnings release that the ongoing probe could hit earnings in the future, even as GSK's China sales jumped 14%. The firm -- and other leading Big Pharma giants -- can't afford to slip up in this growing market, especially as China vies to become the second-largest pharmaceutical market in the near future.

Abbott Labs has also felt the heat from China's probes, as Chinese regulators investigated pricing structures in the country's infant-nutrition industry. Nutrition's become a key part of Abbott's post-pharmaceuticals life -- it's Abbott's largest segment by sales, and grew strongly in the most recent quarter. Considering China's intense demand for baby formula, Abbott investors need to hope that the government's forced recall of some products, and subsequent fine, doesn't grow into something even worse.

Which companies up next in China's widening probe? According to a report from Reuters, the government next could go after the telecom, auto, and oil sectors, among others. It's hard to tell just how much of an impact this expansion of the probe will have, however, considering how many firms in these industries are state owned, and, thus, extensions of Beijing's ambitions.

PetroChina and fellow oil major SinoPec both interact with foreign oil firms through partnerships in the country, but it'll be a much more shocking turn of events if Beijing accuses its own state-run firms of price-fixing - especially as oil demand picks up in the country, given the explosive rise of China's auto sector.

PetroChina's been dealing with problems of its own recently, as the government of Chad accused PetroChina of an oil spill in the African nation and suspended the firm's operations. China's turned toward Africa in its bid to increase its dominance of natural resources, and the setback won't help PetroChina increase its presence in the growing continent. PetroChina's shares have sunk this year to the tune of a 19% year-to-date loss, but the long-term picture for this company -- as long as the Chinese middle class and urban populations continue to increase and fuel oil demand -- looks optimistic.

If there's one industry that's survived and thrived through China's slowdown, it's the auto industry. There's good reason to believe that the most successful investors over the next few decades will be those with exposure to China's massive and growing population of domestic consumers. And there are few things that these consumers are likely to purchase with more enthusiasm than cars and trucks. In this brand-new free report, our analysts get out in front of this trend by identifying two automakers that are poised to surge along with China's middle class. If you want to be among the smart investors who get rich from this growing trend, then you'd be well advised to instantly download our free report on the topic by clicking here now.

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