Reality Check in China as the Economy Slows

For example, General Motors sold more vehicles in China than in the U.S. in 2010, and nothing on the policy assembly line today threatens auto shopping. Caterpillar has also made and sold infrastructure building equipment in China since the 1990s to shore up construction. After a slump, the government wants to rebuild construction investment this year in railways and low-cost housing. GM shares have lost about a third of their value since this time a year ago, and Caterpillar has shed 17%. Can't blame China, though.

I forecast a bit of economic remodeling to meet policy ambitions and absorb ripples from southern Europe. That will cost, but not for long. So, for now, steer away from cyclical-sensitive sectors such commodities and industrial machinery. Chinese banks, insurance companies and utilities are safer. On that front, try China's Hong Kong-listed Ping An Insurance Co. Its share prices have fallen by a quarter since this time in 2011, but it stands to gain as the government said in May it would let insurers issue convertible debt that can be counted as capital before being converted into shares.

Remodeling should be done before year's end. By then, Beijing may do more to stimulate consumption and fixed asset investments through subsidies and tax cuts, says market research firm Forecast Ltd. in Singapore. Company economist Connie Tse is eyeing a rebound by the fourth quarter, "which may potentially help keep full-year GDP to around the magic 8%."

Imagine the gains in the prices of riskier stocks if China's economic growth this year surprises at a more-than-magic 10%.