If You Want a Forecast for China's Economy, Ask a Hairy Crab

Email

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

This is the time of year in which many The Geiger Index - Keith Fitz-Gerald investors really start to study corporate earnings, jobless statistics and all sorts of other state data in an effort to divine what’s next for China.

But I simply prefer to head for the Wan Chai Street Market in Hong Kong, or the Temple Street Night Market across the harbor in Kowloon, and check on hairy crab prices as we approach the Lunar New Year.

These delectable little guys are usually served steamed, with a splash of soy sauce. When China’s booming like it was in recent years, shoppers are hard-pressed to find a store that can keep them on the shelves. And at 720RMB, or $420HK (about $60 U.S.), that’s no small feat for a palm-sized morsel. They’re expensive, and taste great.

A hairy crab, if you’ve never seen one, is usually a bit smaller than the Dungeness crabs many Americans are more familiar with. These freshwater crustaceans start to fatten as soon as the autumn chill cools the Yangtze River Delta. That adds to their taste and desirability.

When China’s feeling pinched, hairy crab sales drop and prices plummet. At the moment, hairy crab prices are off by more than 80%, which is a steeper drop than during the Asian Financial Crisis a decade ago, or during the SARS epidemic in 2003. After the best sales in history last year, that’s significant because of what falling hairy crab sales imply about the state of China’s economy at a time when it is struggling to stave off the effects of a global recession and growth may drop to the slowest pace China’s seen in nearly a decade.

Since hairy crabs are a luxury both in the home and at restaurants, the falling prices suggest that people are “eating cheaper.” Rather than ordering up haute cuisine – including hairy crabs – at such restaurants as Cuisine Cuisine in the International Financial Centre (IFC) Tower, or the famous Jumbo Floating Restaurant in Hong Kong Harbor, most Chinese are eating “cheap” and seem to prefer smaller, more modest places these days.

They’re also apparently “shopping cheap,” too. Call it a Chinese version of the “Wal-Mart Effect” (WM), but that’s what’s happening as savvy Chinese consumers downshift. They’re still spending – as reflected by Chinese retail sales figures, which suggest year-over-year growth of 21% in 2008 – but they’re spending differently.

Nowhere is this change more evident than in those stores where luxury items are sold. Shanghai and Hong Kong store managers I’ve spoken with recently told me privately that such big-ticket brand names as Dior, Chanel, Hermes and others aren’t moving as fast as they were a year ago.

Knock-offs, of course, are still flying off the shelves.

On a related note, many Chinese merchants are actually refusing to take credit cards these days, at least from Chinese consumers. Don’t think for a minute this is limited to convenience store items, either. Big-ticket items like tours and holiday excursions that have long been paid for on credit are now cash or check only as many travel companies – like Hong Kong’s Sincere International Travel Service Co. Ltd. – look to avoid getting caught short.

Many merchants say that banks are hoarding cash and delaying payments on personal credit cards. While no banks would comment officially in response to my inquiries, it’s clear that Chinese lenders are dumping riskier credit-card holders just like their Western banking brethren. Only faster.

Unlike their Western cousins, for whom credit has been a bonanza, Chinese banks have only relatively recently gotten into the credit game after being so cash-centric that the rest of the world’s bankers viewed China’s lenders as antiquated. But now that generation of cautiousness is paying off.

Chinese banks are apparently also going the extra mile to ensure they don’t get burned. Lenders are making credit-card transactions as unattractive as possible for the merchants who process the charge slips and they’re doing so by using the most effective tool of all – delayed payments.

Only a year ago, most banks paid credit-card transactions in 14 days. But now, according to reports by CNN and other news outlets, it’s not uncommon for a merchant to have to wait 20, 40 or even 90 days to get paid. And that obviously affects cash flow at a time when luxury businesses in China are already under pressure.

This all speaks to something we at Money Morning have talked about repeatedly over the past 12 months: Investing in China is not about luxury as so many investors have mistakenly thought. It’s about the basics. To be sure, luxury items and top-shelf brands have enjoyed a heyday in China that coincides with the dramatic growth spurt the country has experienced in recent years. But luxury brands are hardly the key to steady growth and profits over the long term.

That mantle, instead, belongs to much more basic industries, such as power-generation, railway-and-infrastructure construction, water filtration, and pollution control. All will benefit substantially from China’s $583 billion stimulus package, which is designed to fuel growth that not only benefits the economy, but also staves off social unrest, which is what Beijing’s power elite fears the most. To China’s Politburo, running out of power is a far more significant risk than running out of Gucci.

So for investors who are interested in grabbing the best that the Red Dragon offers while avoiding the risks there, hairy crabs are yet another harbinger of where and how to invest in China in 2009.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald will be personally leading our 7th annual Chinese investment tour this April and invites anybody who wants to sample hairy crabs to join him. It’s a great way to see firsthand how and why China is critical to the global economic recovery and to our individual investing futures – not to mention that it’s also a great opportunity to sample some truly spectacular food. Please click here to learn more.
Fitz-Gerald is also the editor of the new “Geiger Index” trading service.As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

News and Related Story Links:

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

Read full bio

  1. rob jameson | January 8, 2009

    I live in Shanghai and I have never seen so many young people signing up for credit cards since i've lived here – more than 2 years. Therefore i question your articles point about saying banks in china are reducing credit. They are trying to increase domestic spending so increasing credit card sales amongst its urban dwellers is essential.

    Perhaps business loans are being restricted to reduce higher risk loans.

    Lets not have too much negative reporting on China please. Look at the log in your own eyes before pointing out the spec in another's eye!

  2. Graham Turville | January 9, 2009

    Credit Card growth will be significant in China but the most important issue is that the credit limits will be much stricter than in the "developed" world. Most Westernised economies lenders still believe that the economic circumstances of an individual never change – i.e. as long as you pay back the minimum sum per month (principal+interest) you are looked upon as a premium client and more than likely will be offered a higher limit as a result. A friend of mine was offered an additional $10K recently but in the interim had lost his job and is struggling!!! In China this will not happen – they are very astute.

    As for being negative on China Mr. Jameson – we must all face the facts – things are not good pretty much anywhere – get used to it 2009 is not expected to be any better than 2008!!!!!

  3. Michel de Florenca | January 10, 2009

    I see strong merit in what both Mr Jameson and Turville have mentioned regarding credit card practices in China as i have experienced. There is an underlying pool of wealth within the chinese economy with little social and cultural changes being made from an economic perspective.
    there is a definite shift in consumer spending, which is basically focussing more on meeting needs and cutting back on wants. for example: rather than drinking premium imported beer, cheaper local or imported products are being consumed, so we are seeing product or brand substitution – not a drop in consumer spending habits!More importantly, there is a push toward having consumers spend money in China or Hong Kong and restrict their exposure to purchasing goods thats sees the money leave the country. the chinese are very tuned into this and have an uncanny natural understanding of the laws of economics. Yes there are many properties and luxury goods being placed onto the market place at several 100% below 2008's prices, but if you investigate this a little more closely, you will find that this is largely derived from expatriate and foreign investors in China and Hong Kong rather than the Chinese whom have been converting US$ and assets into cash or gold for the last 18 months and are poising themselves for a massive spending spree within the real estate and other markets.
    Never underestimate the underlying intelligence of the savvy chinese people.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *


× nine = 9

Some HTML is OK