Malcolm Graham
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China’s economy is a lot stronger than you think it is

Insight from U.S. executives indicate that fears are overblown

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Concerns over slowing construction in China are warranted, but Chinese consumers are in remarkably good shape.

A lot of analysts distrust Chinese economic data.

But there’s a hack for that: Study the trends at companies with significant exposure to the world’s second-largest economy. They offer detailed analysis of China in their conference calls.

I recently drilled down on the commentary of over a dozen companies that do a lot of business in China, and here are the key takeaways.

  • China is OK, even if there are areas of weakness like heavy construction and mining.
  • Chinese consumers are in remarkably good shape.

U.S. consumers are in good shape, too. This means you should position your portfolio for a Santa Claus rally in U.S. stocks. It’s going to build as fears about China ease, and U.S. consumer spending helps the U.S. economy — and China’s as well.

Let’s start with the good news on China.

Chinese consumers are spending like crazy

It’s tough to get nervous about China when you see how much Chinese consumers fork out for handbags, sneakers and java. This is good news, because it confirms that China is successfully making the transition to a consumer economy from one based on manufacturing. A big part of the bear case on China is that it will flub this transformation. Not so, judging by the results of four consumer companies that do a lot of business there. Let’s look at some examples.

Overpriced Starbucks coffee? Chinese consumers don’t even bat an eye.

The company’s China Asia-Pacific division posted 18% third-quarter revenue growth, and that includes the drag from a strong dollar. Now, Starbucks Corp.SBUX, -0.50% is expanding rapidly in China. It opened 1.5 stores a day in the quarter. So you have to adjust for this. But even accounting for it, China Asia-Pacific sales are great. On a same-store basis (outlets open more than a year), sales advanced 6%. China posted the strongest comparable-store growth in the Asia-Pacific region.

“Our business in China remains very, very strong,” said John Winchester Culver, the president of Starbucks’ China & Asia Pacific division, on the company’s Oct. 30 conference call. “We’ve seen no systemic slowdown in our business in China.”

Starbucks’ rapid expansion in China also confirms the health of its economy. After all, Starbucks is not dumb. It would not be expanding so aggressively if it thought the Chinese economy was about to fall off a cliff, as the gloom-and-doom crowd wants you to believe. Expansion in China will account for half of Starbucks’ 2016 growth — it plans to open 900 stores, on top of the 1,800 that are already there in 95 cities. It wants to have 3,500 stores in China by 2019. “We’re just very optimistic about the opportunity,” said Culver.

When buying pricey coffee, Chinese consumers reach into expensive handbags for the cash. How do we know? Coach Inc. COH, -2.02% posted great sales in China for the third quarter. Tellingly, most of the growth was in mainland China, the part of China that the bears are most worried about. Double-digit growth there offset weak sales in Hong Kong and Macau. The trends are so good in China, Coach reaffirmed its guidance for the year.