The trouble with relying on China as the future of the global car industry is that the people in the People’s Republic have lost some of their voracious appetite for new vehicles. The China Association of Automobile Manufacturers reports that, in January, sales of cars and light vehicles dropped 23.8% year-over-year. Analysts blamed the lunar holiday. But sales rose only 5% in all of 2011. So, the market has softened considerably.

China may produce sales of 18 million vehicles per year, well above the 13 million or so in the U.S. But car companies realize that American car sales are rising rapidly, while Chinese sales are not. The U.S., just two years ago the black hole of car sales, has become a foundation for revenue of multinational manufacturers. China has become a market where large investments in factories and marketing is a problem, at least for awhile.

Another challenge for foreign car companies in China is that local companies have grown tired of watching manufactures from the U.S., Japan and Europe exploit their market. All of the large local firms have learned manufacturing from their joint venture partners like GM and VW. That gives them the ability to stand on their own, and that can only hurt the sales of outsiders.

China has lost some of its luster for foreign car companies — that is, sales there have faltered — for a a number of reasons. Among them is that China’s middle class faces the effects of an economic slowdown and an inflation rate that hit 4.5% last month. And many Chinese cars are still relatively new. The factor of the replacement of cars that are six years or older, which is the cause for much of the improvement in sales in the U.S., is not as large a factor in China. There, the really huge volume in annual sales only happened in the past several years. The Chinese may not be ready to trade their cars in yet.

China, once the biggest hope for sales by global car companies, cannot sustain the revenue increases that the industry hoped it would.

Douglas A. McIntyre

There is a cottage industry that gains directly or indirectly from insisting that Chinese numbers are fairly accurate and far better than the bad old days of 15 years ago. But reasons for scepticism abound.

That cottage industry will grow as the debate over whether China is headed toward a soft landing or a hard one continues — if it is headed for a landing at all. Fortunately, most of what happens in the economy of the People’s Republic is available from sources other than the government there.

China’s agencies reported two pieces of data recently. The first was January PMI, which showed expansion in the sector. The figure was 50.5 against a consensus among economists of 49.5. And China Real Estate Index System reported that average home prices in the top 100 markets fell 0.18%. That is a large contrast to two years in which prices in some markets were up in double digits.

If Chinese data are flawed, either because its statistics collection is inadequate or there are sinister distortions, it is unimportant for several reasons. From the outside of the country, economists have a relatively good idea about what China imports and what it pays for those imports. Additionally, the picture of what the People’s Republic exports is gathered by virtually all of its trade partners. In other words, the measure of China’s economic fortunes can be taken from outside.

One thing that is certain is that China’s PMI, and probably its real estate values, will be damaged by the crippled EU economy. Whether that shows up in China’s figures is academic, no matter what the PMI data show. Exact accuracy of the figures is not important.

Douglas A. McIntyre

Many investors believed that the company’s earnings report was going to be today but we do not yet have any formal date for its earnings release.

Is it possible that today’s trading bump in CALL and PUT options was simply a calendar mistake?  This seems odd, but in today’s world and with the way reporting has been out of China the best rule is to not be surprised by anything there any longer.

Baidu’s stock (or ADR) closed down 0.5% at $130.73 and its 52-week trading range is $100.95 to $165.96.

JON C. OGG

It has been generally assumed that manufacturing and exports are absolutely critical to China’s future GDP expansion. However, one concern about this advance is that the success of these businesses has caused widespread agitation for higher wages. Even President Obama recently said the price of Chinese labor would cause a return of manufacturing to America. It is not so simple. America does not have China’s manufacturing infrastructure, although it once did. The U.S. would need years to create the capacity. Nonetheless, wages have become a problem in China. Nothing solves that problem more than slower growth.

China’s central government will make money more available, as a means to cushion a slow economy. Access to capital will help the manufacturing sector build for the time when the global economy needs it, while current slow growth will cap wage increases. The formula is not as good as outright growth, but it is a reasonable bridge. Global GDP will not remain halting forever. In fact, consumer and business activity in the $14 trillion U.S. economy has already gained speed. That will not entirely offset problems in Europe, but it gives China a ready and improving market.

China is in the midst of a fairly serious contraction of its manufacturing sector, which has no precedent in recent years. But there are some silver linings that could keep the People’s Republic from a landing that is entirely hard.

Douglas A. McIntyre

Real estate values have begun to drop sharply in China. Some economists may argue that this will undermine the central government’s plan to stage a “soft landing” in which GDP slows to 7% or 8% from recent rates of nearly 10%. Whatever the impact may be, China’s National Statistics Bureau reports that home prices only rose during December in two of the 70 cities it measures. Prices in 52 of those markets fell. China’s real estate situation has begun to resemble the one in the U.S. in 2007.

There are no ready statistics about how much equity the Chinese can take out of their homes directly, as Americans could do with home equity loans. Suffice it to say that people with home values well in excess of mortgage values are likely to use their incomes for consumer spending, at least in contrast to people with underwater mortgages. There is not enough data from China to show whether many of the mortgages there are underwater or headed in that direction. It does not matter much. Falling home values are a threat to consumer activity as owners grow cautious about the future, at least if the U.S. is an indication.

So far, China’s home value declines may not be married with high unemployment as has been the case in the U.S. for nearly four years. That double weight undermined consumer activity enough to cause GDP contraction. China’s employment figures are not considered reliable. From outside the country, a home price and unemployment pairing cannot be measured.

What can be measured is the slowdown in China’s manufacturing activity and its GDP. China’s central government also has eased monetary policy, a sign of concern about expansion. Contractions of factory activity in a country as dependent on it as China is almost certainly means that employment prospects are not strong. The trouble is magnified by the number of people who have relocated to large cities. New data shows that, for the first time, more Chinese live in cities than in rural areas. Most large Chinese cities have been built to accommodate the country’s expanding factory base.

One half of the trouble that ruined the U.S. economy — housing — is in place in China. The other — unemployment — may have begun or will soon. What might have been a soft landing is about to get hard.

Douglas A. McIntyre

China’s leadership may use the data as a reason to make money more available to businesses in the People’s Republic. That would tend to offset some of the slowdown in the world’s economy, although nothing can be a complete balance against a falloff in the global demand for China’s finished goods.

China 8.9% growth came without substantial monetary easing and in the face of deep trouble in Europe, which almost certainly undermined demand for exports from the world’s second largest economy. That left the U.S. and the developing world to help drive the 8.9% improvement, along with whatever internal demand existed among China’s middle classes and manufacturers. The U.S. economy rose in the past quarter, but not enough to help China much. Demand from nations like Brazil and India was not large enough in aggregate to represent the entire cause for the rapid 8.9% rise.

The question of China’s GDP should focus on internal consumer and business spending. It may be that factories continue expansion because of a belief that the demand for goods overseas will rebound. It is just as likely that a financially healthy middle class contributed to it. There are several reasons that may be the case, led by wage increases that have been prevalent during the last year.

China’s 8.9% GDP improvement is remarkable, particularly based on the massive size of the nation’s $6 trillion economy. China’s economic expansion rate may have slowed slightly, but not enough to undermine the fact that it is extraordinary in a world in which the GDP of developing nations is hardly above a flat line.

Douglas A. McIntyre

Many of Apple’s suppliers are well-known, but the list includes Advanced Micro Devices Inc. (NYSE: AMD), Cypress Semiconductor Corp. (NASDAQ: CY), Broadcom Corp. (NASDAQ: BRCM), Fairchild Semiconductor International Inc. (NYSE: FCS), Flextronics International Ltd. (NASDAQ: FLEX), Jabil Circuit Inc. (NYSE: JBL), Vishay Intertechnology Inc. (NYSE: VSH), TriQuint Semiconductor Inc. (NASDAQ: TQNT), SanDisk Corp. (NASDAQ: SNDK), ON Semiconductor Corp. (NASDAQ: ONNN), and Qualcomm Inc. (NASDAQ: QCOM).

The report is based on 229 audits, of which 14 were specialized environmental audits and 27 process safety audits. Apple found 6 current cases of suppliers hiring underage workers and 13 historical cases of child labor violations. About these violations, the company said:

In each case, the facility had insufficient controls to verify age or detect false documentation. We found no instances of intentional hiring of underage labor. We required the suppliers to support the young workers’ return to school and to improve their management systems—such as labor recruitment practices and age verification procedures—to prevent recurrences.

Chinese environmental groups last year charged that 27 of Apple’s suppliers were dumping toxic gases and heavy metal sludges into the country’s land and air. The company’s audits revealed that 112 supplier facilities were not properly storing, moving, or handling hazardous chemicals correctly; 69 facilities were illegally dumping or failing to recycle hazardous waste; and 52 facilities failed to label hazardous materials. Apple also reported that 58 facilities failed to monitor and control air emissions.

Apple had come under increasing pressure to name its suppliers and to hold them to a higher standard following suicide attempts by 18 workers and 14 deaths at China’s Foxconn facility in 2010.

Paul Ausick

Patriot Coal officials said demand for met coal has weakened in the last few weeks, especially export demand. Demand from China, the world’s largest importer of met coal, is expected to remain weak through the first half of the year, although demand is expected to rise in the second half as Chinese and European economies begin to grow again. Total consumption of met coal could fall by 13 million metric tons in 2012.

In the late morning, Patriot Coal shares are down more than -9% at $8.18 in a 52-week range of $6.92-$29.20.

Shares in Alpha are down nearly -8% at $20.76 in a 52-week range of $15.49-$62.65.

James River shares are down more than -8% at $6.77 in a 52-week range of $5.41-$25.59.

Steel maker Arcelor Mittal is down nearly -2%, while US Steel and AK Steel are both down about -3%.

Paul Ausick

The General Administration of Customs said China’s crude oil imports were 253.8 million tons in 2011. The figure in December was modest by recent standards — only 21.9 million tons. Bloomberg reports that the annual figure was higher by 6%, but that the December number was down from the same month a year ago. The data offer some hope that oil prices will not remain very high, even with problems in the Middle East and Iran.

China is the world’s largest importer of crude. It passed the U.S. in that category more than a year ago. The insatiable demand for oil to drive the manufacturing machine of the People’s Republic, and its transportation as well, has been a significant cause of the unusually high price of oil over the past three years.

The first reaction to China’s overall import numbers for December was to suspect that its consumers have become worried enough about their national economy to have curtailed their buying activity. Chinese factories may need less material to make finished goods for export — an action that would bring down imports of raw materials. China is a large enough importer of goods and services that a drop in its growth will hurt GDP among its trading partners, which include particularly high levels of activity in the U.S. and EU.

The cost of oil is considered one of the greatest threats to global GDP growth. No one knows what price level would tip much of the world back into recession. Crude has been above $80 most of the past year. That by itself does not seem to have hampered improved economic growth in the U.S., but who can tell if the improvement would have been stronger if oil traded at $50 a barrel during 2011. The EU could use any help as it tries to revive growth in its weakest economies, so $100 oil prices for an extended time would be a dangerous drag.

The Chinese oil data does offer a little hope for oil prices. Some analysts believe that an interruption of shipping through the Strait of Hormuz could push crude above $150. That would be a disaster for the world economy. There are some offsetting factors, though. One is the chance that some nations would release supplies from strategic oil reserves. Another is that traders cannot gamble that China will continue to have an increased appetite for oil.

Douglas A. McIntyre

Germany cannot defy the gravity that has pulled much of the EU region close to recession, and some parts of it to negative GDP growth. Demand in the U.S. and China for high-end manufactured goods, pharmaceuticals and software may be relatively good. But Germany’s GDP is $3 trillion. That is not far behind Japan, and nearly 50% more than Brazil, France and the UK, taken individually. An economy of Germany’s size can hardly thrive without some robust demand from nations within its region, coupled with a U.S. economy that is in a recovery, albeit a weak one.

The U.S. faces a problem similar to Germany’s. The EU, which in total has a GDP of $15 trillion, has to continue to have reasonable consumer demand, as well as corporate demand for U.S.-originated goods and services. Germany will help drive some portion of this. But most other European economies will not. Neither will Japan. That leaves China, which may not do as well as it has economically. The People’s Republic will post a drop-off in consumer activity expansion as a slowdown in its factory production undermines growth in its new middle class.

China’s massive manufacturing sector should be able to rely on the U.S. and German markets, along with Brazil, India, South Korea, Mexico, and Canada. That will not to make up for slack demand from large economies, which include the UK, France, Japan, Italy and Spain. It is simply too much to ask of emerging market nations and the balance of North America outside the U.S.

Based on comments from economists and the press, the U.S., Germany and China should have relatively good years as measured by GDP. If so, the improvement will have to draw largely from trade activity among them. That by itself cannot drive a good year among the three. They are not decoupled enough from the balance of the world’s economy.

Douglas A. McIntyre