7 Things You Need To Know About China
How to cope with and profit from China’s slowdown.
Read more here: What a Typical Chinese Investor Worries About
Investors seeking an upbeat indicator out of China probably missed this one in November: a Photoshopped picture of Jack Ma, chairman of e-commerce giant Alibaba (BABA), in a Tang Dynasty–era dress, wig, and makeup. Alibaba had persuaded customers to spend a record-smashing $14.3 billion on Nov. 11 (Singles Day, China’s answer to Black Friday). The Ma picture, which went viral on Chinese social media, represented a sort of coronation; its caption explained that Ma, never known for his dashing looks, was beautiful enough to seduce China into a display of unprecedented consumerism.
That kind of joshing boosterism was hard to imagine when 2015 began. The year started with news that China’s GDP growth in 2014 had fallen to a 24-year low (in 2015 it was expected to drop below 7%). A summer stock market crash, in which shares fell 40%, added fuel to the narrative that China was on the brink of a meltdown—a narrative that contributed to an ugly correction in U.S. stocks in August.
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But that meltdown hasn’t come. Industrial production keeps growing, if less rapidly. Real estate prices are rising. The stock market was up by a double-digit percentage for the year by November. And the consumers so persistently wooed by Ma look increasingly strong. Retail sales rose by double-digit percentages year over year in October, and Chinese provinces with large service industries reported GDP growth of 10% during 2015. Yes, when China sneezes, the global economy wheezes, but it seems less likely that the country will drag the world into recession—or capsize investors’ portfolios—in 2016.
 Unloading packages from e-commerce site JD.com after Singles Day, China’s biggest online shopping day.Zhang Peng—LightRocket /Getty Images
Doubts about China’s future regularly “ebb and flow,” says McKinsey’s Jonathan Woetzel, who has worked in China for three decades. He likes to talk about a book predicting an imminent China crash that he sees on display whenever he travels through Hong Kong’s airport. It’s a bestseller—and it’s from 2001.
That’s not to say there aren’t reasons for anxiety. China’s slowdown has hammered commodities and the energy sector, as waning demand depresses prices. Total government, consumer, and corporate debt, at 282% of GDP, is dangerously high: Michael Pettis, a finance professor at Peking University, compares the potential corrosive effect of the debt to that in Japan, where indebtedness stifled innovation and hobbled the economy for two decades.
Another concern is the tenor of the country’s politics. “Despotism is severely stressing China’s system and society,” David Shambaugh, director of the China Policy Program at George Washington University, wrote earlier in 2015. Economic nationalism results in policies that hamper foreign companies’ access to markets, expensive support of state-owned monopolies, and bailouts of the stock market—all signs of China’s unwillingness to truly liberalize its economy (much less its politics) to unlock growth.
Still, China offers investors as much opportunity as uncertainty. Here’s what really matters in the country’s economy—the statistics, companies, and trends you should and shouldn’t watch and worry about in the new year.
Don’t stress over China’s stock markets.
They don’t say much about the economy.
The screaming rise, crash, and rebound of Chinese stock markets in 2015 are evidence enough that the market is not a great indicator of the country’s economic health. (As of late November, Chinese stocks as measured by the Shanghai Composite Index were up 14% for the year.) Stocks make up only about 5% of household wealth in China, compared with a third in the U.S., and only about 8% of the country’s people own stocks, so market swings don’t affect regular investors that dramatically.
It’s fairly normal (in China and elsewhere) for GDP growth and stock markets to be out of whack. For two decades through 2011, China averaged 9.4% growth. At the same time, according to a London Business School study, its stock market returned an annualized negative 5.5%. Then again, many China watchers don’t trust official GDP figures either, noting that the government has an incentive to manipulate them.
What to watch instead? Some analysts like the Li Keqiang index, which relies on electricity usage, freight volume, and bank-loan growth to track industrial activity in China. It’s named for Premier Li Keqiang, who once told a diplomat that it was his preferred measuring stick. It’s worth noting that different versions of the Li index often yield numbers lower than the official GDP (see the chart on the next page for an example). Other analysts track South Korean exports to measure the health of both Chinese consumers and heavy industry; the country ships a fourth of its exports to China.
Keep your eyes on China’s consumers.
Their rise is the real story to watch in 2016.
In Beijing, twentysomethings wearing fake New Balance shoes, fake branded jackets, and no-brand backpacks squeeze themselves onto subway cars. Then they all stare down at their iPhones. It’s a sign of what economists mean when they say China is “rebalancing.”
Service- and consumer-oriented sectors make up half of China’s GDP, compared with 80% in the U.S. The government is cheerleading for a transition toward consumer spending because the boom-time model of relying on infrastructure building and heavy industry for growth doesn’t have a lot of steam left. When service industries replace manufacturing in a country, its economy needs 30% more jobs to produce the same unit of GDP, as Stephen Roach, former chief economist at Morgan Stanley, has written. That means more gainfully employed Chinese consumers can keep fueling growth in spending even if the country never replicates the big GDP numbers of recent decades.
Actor Daniel Craig (L3) and Alibaba Chairman Jack Ma (R3) attend a Singles Day event in Beijing.ChinaFotoPress—Getty Images
The companies that capture consumer loyalties today could be winners in a decades-long transition. Apple’s (AAPL) China sales increased 99% year over year last quarter, to $12.5 billion. Nike’s (NKE) shoe sales are growing faster in China than anywhere else. Honeywell (HON) is supplying plane parts to meet boom times in Chinese consumer travel; the number of Chinese tourists traveling abroad is projected to rise from 116 million in 2014 to 242 million in 2024, says researcher CEIC Data.
A China slowdown doesn’t hurt everyone.
These companies and industries could do well.
Companies whose business aligns with Chinese government priorities should make money, come rain or 7% shine. One such priority: weaning the country from reliance on foreign semiconductors. China consumes 40% of worldwide chips and is spending $20 billion a year to build its own industry. Counterintuitively, that could be a boon for a few foreign companies, including Cadence Design Systems and the U.K.’s ARM Holdings, says Northland Capital Markets analyst Gus Richard, because they license technology to dozens of Chinese chipmakers.
Another priority: health care reform. The government wants private companies to help combat the long queues and questionable service at state-run hospitals. Conglomerate Fosun recently bought one of China’s best-known private hospital operators. Switzerland’s Roche Pharmaceuticals is posting strong China sales for its cancer drugs, while Pfizer has benefited from the government’s reliance on online and generic-drug sales to rein in costs. Even sportsgear makers may get a state-driven bump: The Communist Party wants more youth leagues and recreational teams. There could soon be 300 million basketball players in China, says Deutsche Bank analyst David Weiner, fueling growth for Nike, Under Armour (UA), and Adidas. And President Xi Jinping’s campaign to improve China’s soccer program, which hasn’t reached the World Cup since 2002, should also help Adidas.
Don’t be distracted by foreign reserves.
The dollar’s rise may skew the numbers.
For a while in the summer of 2015, it appeared as though outflowing money might cripple China. The nation’s foreign reserves fell by $250 billion in the first half of the year, then by another $137 billion in July and August—more than 10% of the total altogether. Nervous stock investors sold on the news in emerging markets and the U.S. But the most astute China watchers say falling reserves aren’t always a sign of a crisis. In this case, the decline had to do with some businesses and wealthier individuals exchanging Chinese renminbi for dollars as the dollar continued its thunderous rise in value. When they stored those foreign assets in their banks, they weren’t counted in China’s official reserve data—even though most of the money stayed in the country. As Emerging Advisors president Jonathan Anderson, a respected analyst, said at the time, “This is likely to be a cyclical phenomenon rather than a massive structural problem.”
Real estate shouldn’t make you nervous.
China’s bubble issues are different from ours.
Housing and commercial construction account for 15% of China’s GDP, according to Barclays, and real estate is among the biggest factors in the country’s growth slowdown. In 2014 residential real estate values and sales flagged, and some Western investors predicted a Great Recession redux—with a housing bubble and related debt dragging the economy into the mire.
But that scenario now looks less likely. Chinese residential sales jumped in 2015, driving prices higher and inventories lower across 35 cities. The country’s housing market is more or less walled off from the foreign creditors who pumped money into the recent U.S. housing bubble, so a crash precipitated by those investors yanking support is unlikely. A multiyear price decline could still hurt, but Chinese consumers also pay for a much larger share of their housing purchases in cash than Americans do, which means such a slump might do less damage to the overall economy.
Some U.S. companies will soon get hurt.
But some will cash in on a consumer boom.
The direct exposure of U.S. companies overall to China is relatively small: It accounts for only 2% of S&P 500 revenue, says Goldman Sachs. But some companies have much more at stake in China. American producers of copper, aluminum, iron ore, and steel have been walloped by slowing demand. Coach is among the luxury brands whose revenues have been collateral damage in President Xi’s political assault on corruption, since luxury gifts now risk being seen as bribes.
 Apple sales in China doubled year over year in the third quarter of 2015, to $12.5 billion.Qilai Shen—Bloomberg /Getty Images
China’s focus on homegrown technology could hurt big suppliers to business like Cisco (CSCO), Microsoft (MSFT), and IBM (IBM)—all of which will face more onerous rules in order to keep operating in the country. Another victim of the homegrown trend: Tesla (TSLA). The electric-car maker has so far been excluded from tax incentives that come with buying an electric car in China. Tesla sold only about 3,000 vehicles in China in the first three quarters of 2015, and China’s state press reported in the spring that the company cut 30% of its employees there.
Some possible winners? Disney is opening a theme park in Shanghai in 2016, and ubiquitous Mickey Mouse T-shirts on kids and adults in China attest to the brand’s popularity. SunPower is building Chinese solar plants for Apple. And General Motors’ (GM) profitable trucks and SUVs are becoming big sellers in China.
China’s tech giants: They’re not Apple.
Don’t expect them to take over the world.
Tencent’s social network WeChat has 650 million users in China. But when Tencent brought it to the U.S. two years ago, it flopped. Alibaba has 350 million customers in China. It opened a shopping site in the U.S. called 11 Main—before giving up and selling it after a year. And how many in the West have ever used Baidu’s search engine or a Xiaomi smartphone?
China’s consumer-tech giants have healthy revenues and hefty valuations thanks to their huge, protected home market, but their struggles in the U.S. foretell a greater truth: They aren’t going global anytime soon. Xiaomi (XIAOMI) offers one example of how a lack of tech innovation has hampered expansion. Its phones have taken off in China because of a distribution model that cuts out middlemen and allows rock-bottom prices. But after Xiaomi expanded to India in 2014, Ericsson won an injunction against the company for not paying patent royalties. (Xiaomi denied wrongdoing.)
The state’s strategy of effectively shutting out foreign competitors may hurt Chinese consumer tech over the long term by sapping incentives to innovate. But for now it’s helping fuel some awesome results. Tencent earned $3.9 billion in 2014 on $12.8 billion in revenue; Alibaba, $3.1 billion on $12.3 billion; and Baidu, $2.1 billion on $8 billion. In the short term, they’ve got upside for investors. Just don’t assume they’re anywhere close to expanding outside their home market.
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A version of this article appears in the December 15, 2015 issue of Fortune.