Why Jim Chanos is Wrong About China's "Ghost Cities"
China's "ghost cities" present the West with the shocking images of vast urban areas that sit nearly empty.
In a striking report, shown recently on CBS News' "60 Minutes,"there are rows of high-rise apartment buildings, tracts full of suburban American-sized detached homes and imposing government edifices in China's western desert that are empty and utterly devoid of any signs of life.
Their existence has raised more than a few red flags among investors.
Silver Prices Getting Huge Boost from these Chinese Market Shifts
Twenty years ago China was a very minor factor when estimating the direction of silver prices.
Now, the country is a major force both on the demand and supply side of the silver market.
In fact, a recent report issued last month by Thomson Reuters GFMS for the Silver Institute outlined how China's supply and demand was a major developing factor guiding silver prices in 2013 – and the news is great for those investing in the white metal.
Let's take a look.
The Dangerous Standoff in the South China Sea is About to Boil Over
We've been telling you for months about the ongoing territory disputes in the South China Sea – and warning that it wouldn't take much to spark a major confrontation.
Now you see why.
Today, the anniversary of Japan's 1931 occupation of parts of mainland China, an already smoldering territorial dispute between China and Japan is threatening to boil over.
Major Japanese firms have ordered shutdowns of their Mainland China operations, and Japanese expatriates living in that country have been ordered to stay indoors as angry protests sparked by the territory disputes have kicked the anti-Japanese sentiment to its highest level in decades.
We've been telling you for months that this was inevitable.
Last week, Beijing dispatched patrol boats to the five East China Sea islands that are escalating the disagreement between the two Asian heavyweights. Beijing sent the boats to the Senkaku island region as an angry response to Tokyo's plan to buy the mostly barren islands from their private owners.
Over the weekend, well-known Japanese firms such as Honda and Toyota were the focus of demonstrations and violent attacks. And yesterday, a flotilla of around 1,000 Chinese fishing boats was sailing for the islands.
All of this was prompted by Japan's announced plan to purchase the five afore-mentioned islands from their private owners.
Chinese Foreign Ministry spokesman Hong Lei said the government would protect Japanese firms and citizens and called for protesters to obey the law.
"The gravely destructive consequences of Japan's illegal purchase of the … islands are steadily emerging, and the responsibility for this should be born by Japan," Chinese Foreign Ministry spokesman Hong Lei told reporters at a daily news briefing.
This follows last week's warning by China's Foreign Ministry that "if Japan insists on going its own way, it will bear all the serious consequences that follow."
Although the hottest part of this dispute currently centers upon China and Japan – which generated two-way trade of $345 billion last year – many more Pacific-Region nations are involved.
And, as we'll show you in a minute, there will also be consequences for this country, and for U.S. investors who take the time to understand what's at stake.
Q&A With Keith: The Real Answers in China Are Never That Simple
As you might imagine, I get a lot of questions about China – it's topical and it's very important to our future.
Most are really just reincarnations of concerns voiced since 1970 when China first began to open up. In that sense, they're really nothing new.
So rather than tackling the same old "they'll never succeed because they're not democratic" or "ghost cities" arguments that seem to incessantly make the rounds, let's frame them in terms of what's in the news lately and dig into the subtleties that escape most Westerners.
And, let's start with one of the questions I get the most.
Q – Is China going to have a "hard" or "soft" landing?
A – This one stumps me. Where have the people asking this question been? China's had a soft landing for the last four years. They are already there – the economy is slowing, debt is rising, and the urban migration may be closer to an end than people think.
The fact is that nobody can define what a Chinese soft or hard landing actually is because Western metrics don't apply. It's just a catch phrase that gets bandied about in the media.
That's why I believe this question is really a matter of perspective. For example, there is no question China faces huge challenges, but those challenges are no different than many we've faced here in our own past.
During the last century we experienced two world wars, multiple recessions, a depression, and a presidential assassination — and still the Dow rose more than 20,000%.
China will, too. The genie is not going back in the bottle.
As I recall, many people in England thought that America was a pretty silly venture at one time. And don't forget that the world thought Japan was good for nothing more than cheap tin toys following WWII.
Looking at China through Western lenses is a mistake.
Q – The Chinese copy everything. Companies can't make money there, especially lately.
A – That's simply not true. Domestic Chinese companies have made plenty of money. So have foreign companies like McDonalds, ABB, Coke, and even GM, which have been fabulously successful there because they've taken the time to localize their products.
Not many people know this, but the ultimate sign of executive status is a jet black Buick minivan in Beijing at the moment. How's that for a contradiction?!
We're Not Saber Rattling, We're Simply Connecting the Dots
I love it when our readers take the time to drop us a note. It's tells me they're not only reading but actually care enough to be engaged.
A Money Morning subscriber named Peter M. is one of those folks.
Peter was so struck by what I had to say about the escalating controversy in the South China Sea he decided to leave the following comment:
"Seems like Money Morning is saber rattling. Not a word about the heat & drought in the Midwest and Great Plains? Seems some discussion about our rapidly changing climate might be a better discussion."
First, let me say that Peter's note was well received. But I'd be remiss if I didn't take the time to delve into what Peter viewed as "saber rattling" because I just don't see it that way. As always, my goal is to simply connect the dots.
The thing is, the South China Sea is just one of them.
Here's my response…
Thanks for the taking the time to comment. We've found that folks like you who take the time to post a comment — and who actually contribute some thoughts of their own to the posting – tend to be very well informed folks.
And believe me when I tell you that we like and respect that a lot.
I zeroed in on your comment in particular because I agree with part of it – the part about the importance of the drought. I've written a number of columns about that issue in Private Briefing over the last month or so, including one in back in June that that warned readers that the crop numbers were going to be a lot worse than the government was saying.
In recent weeks, that's just what's happened. (Fortunately, we also showed readers how to protect themselves).
So, again, you and I are on the same page when it comes to the drought.
Now, as far as this business about our South China Sea coverage being "saber rattling," I have to say that I very much disagree.
Part of the problem is that this escalating disagreement isn't getting much coverage in the mainstream U.S. media (and I spent more than 20 years as a mainstream media journalist, and spent time abroad, so I understand this very well).
What's happening in the South China Sea is a tinderbox just waiting for the right spark. And believe me when I tell you that this scares the hell out of our government. We could very well end up being caught in the middle.
Where the Chinese are Putting Their Money
American investors have been in love with the China story and Chinese stocks for more than a decade.
And, there's a lot to like if you know what you're doing and where to look.
But there's an even greater opportunity when you look in the places no one else is looking…except for the Chinese.
China faces a labor crisis. It's not what you think.
They have lots of workers. Some are very skilled, others highly educated. But the ones working in the factories by the millions possess little but what they can do with their hands.
Their wages are not enough to buy the very purses they sew or bicycles they assemble. That is changing, slowly. The change is becoming painful for Chinese factories.
You see, China does not have factories that have huge margins for profit.
The country has succeeded by being the lowest-cost producer in the world, selling its wares at razor-thin margins to quash any competition.
The resulting success has made China a global powerhouse…but it has also resulted in an unintended consequence: inflation.
China is one of the few emerging countries that I have been to where the government offers few subsidies. Take gasoline, for example. It costs over US$5 per gallon for gas today in China.
That's more than the U.S., and it's a lot more than India, which subsidizes fuel.
The price for everything is going up for the local population, so now they're demanding higher wages.
And they're getting higher wages, which means even lower profits for factories already stressed by a global economic contraction that has end customers unwilling to pay more.
There is a fix. And that fix is going to make you money. It's where the Chinese are putting their money — lots of it.
Forget About the Trade Deficit, Now is The Time to Invest in China
You may have heard that China just posted the biggest trade deficit figures in over a decade .
Naturally, this caused the usual suspects who have been waiting – some would say hoping – for a Chinese crash to jump up and down with excitement.
But not so fast guys… one set of figures doesn't tell the entire story.
The truth is the $31.5 billion trade deficit is actually a sign that things inside China are growing and that imports are becoming a more viable part of China's future than ever before.
It's exactly as I've been telling Money Morning readers for several years now.
Up some 39.6% year-over-year, the numbers are far ahead of expectations and a good deal higher than the 15.3% contraction China experienced in January.
True, exports climbed at only 15.3% versus the 18.4% expected rate, but that's still plenty positive at a time when the so-called developed world is on track for overall growth of 1.3% according to The Conference Board.
Get used to it.
As China's wealth rises and its internal consumption strengthens, imports are going to decouple from exports and deficits like these will be the norm.
If anything, these numbers reinforce the notion that investors should be actively looking to China and be accumulating Chinese investments.
What Smart Investors Recognize about China
For starters, how China processes its imports. It used to be that the majority of stuff we sold them was fashioned into exportable goods that came boomeranging back to our shores as finished products.
In other words, we sold China handles and steel and they sold us shovels.
Maybe I'm exaggerating, but not by much. Today, more of China's imports now go straight to domestic consumption than we've ever seen before.
What's happening is not magic. There is no rocket science. No hocus pocus.
Why China's "Blindside" Could Be A Great Buying Opportunity
There's not a day goes by that I don't see some variation of the theme that China is going to crash, or that somehow that nation will blindside us, and that its markets may fall 60%.
This is like saying the U.S. markets were in for a hard landing in March of 2009 after they had fallen more than 50%. Folks who bit into this argument and bailed not only sold out at the worst possible moment, but then added agony to injury by sitting on the sidelines as the markets tore 95.68% higher over the next two years.
People forget that the U.S. stock market – as measured by the Dow Jones Industrial Average using weekly data – fell more than 89% from 1929 to 1932, more than 52% from 1937 to 1942, and more recently experienced a decline of more than 53% from 2008 to 2009 – and that doesn't even account for four 40+% declines beginning in 1901, 1906, 1916, and 1973.
Each was a great buying opportunity, and following those meltdowns, our markets rose more than 371% from 1929 to 1932, more than 222% from 1949 to 1956, more than 128% from 1937 to 1942, and more than 95.68% in just over two years starting in March 2009 – one of the fastest "melt-ups" in market history.
People forget that world markets dropped 40%-80% in 1987. And as legendary investor Jim Rogers noted earlier this month, that was not the end of the secular bull market in stocks, either.
People forget that our nation endured two world wars, a depression, multiple recessions, presidential assassinations, the near complete failure of our food belt, not to mention the deadliest terrorist attacks the world has ever seen, and more.
And guess what? It's still been the best place to invest for the last 100 years.
So what if China backs off or slows down?
The Asian currency markets blew up in 1997. Mexico's market fabulously went up in smoke during the great tequila crisis of 1994. And Argentina failed to the tune of a 76.9% crash starting in 1997 only to give way to a 1,724.56% rally from 2001 to 2011.
Gold rose by more than 600% in the 1970s, then fell by 50%, which terrified investors at the time. It subsequently rose by more than 850%, something else Mr. Rogers noted in recent interviews, as have I.
China is undoubtedly going to have several hard landings in our lifetime. Despite the fact that China is thousands of years old, modern China is a mere 40 years old, if you consider its opening following the historic Nixon-Kissinger visit in 1972.
And today's China has 1.3 billion people — all of whom want to live the way you do.
It's growing by an average of 9% a year or more and has done so every year for the last 41 years straight. We've just poured an estimated $7.7 trillion into our economy and the best we can do is 2.5%. The European Union (EU) is on track for 0.2% growth in 2012 after trillions in euro backing there.
China Still Key for Investors Despite Slumping Stock Markets
Despite the recent downturn in China's stock market, investors need to remain focused on the profit-generating long-term growth potential of the Asian powerhouse.
Chinese exchange-traded funds (ETFs), a popular way for U.S. investors to dip their toes into the Chinese stock markets, are off an average of more than 21% for 2011. That's a big shift from 2010, when the average China fund gained 13%, or 2009, when the average gain was an eye-popping 64.5%.
Anthony Bolton, one of the United Kingdom's most respected fund managers, called the end of the third quarter "a brutal period for Asian markets – as difficult a time to be running money as I can remember."
Bolton's U.K.-based Fidelity China Special Solutions Fund dropped 28.9% in six months.
A recent bounce up from lows reached in October has some experts wondering if China's stock markets hit a bottom or if they might slip still lower, but in any case investors mustn't abandon China, said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
"Long-term, you can't afford to be without Chinese stocks," Fitz-Gerald said. "Timing is not what you should be focused on. You need to be focused on growth, and who has the money."
Fitz-Gerald pointed to the debt-crippled economies of the United States and Europe.
"That's not where the money is," he said. "It's in the emerging economies like China."
Several factors have combined to rock the Chinese stock market this year. The Chinese government has attacked inflation by raising interest rates five times over the past 12 months, but at the cost of slowing economic growth.
Even so, the Chinese central bank has projected the country's gross domestic product (GDP) will grow at a 9.2% rate in 2011 and an 8.5% clip next year.
That's still more than triple the growth of the U.S. economy. The Philadelphia Fed's quarterly survey yesterday (Monday) lowered its projected U.S. GDP for 2012 to 2.4%.
Pay to Play: What China's Rising Wages Mean for Investors
There's a sea change underway in China's economy – one that's evident in soaring prices, shrinking trade surpluses, and higher property values. And it's being driven by higher wages for workers that for decades have been grossly underpaid.
From the country's fast-growing urban centers to its frontier countryside, wages are rising rapidly across China.
China's 31 provinces boosted minimum wages by an average of 24% last year, according to Yin Weimin, China's minister of human resources and social security. Meanwhile, the average monthly income for migrant workers rose 13% to $256.89 (1,690 yuan).
Six provinces already have raised minimum wages this year, and labor shortages and government mandates will likely compel the remaining 25 to follow suit.