China
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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.
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Invest in the Chinese Yuan Before It Takes Over the Financial World
It's only a matter of time before the U.S. dollar loses its more than 50-year reign as the world's dominant reserve currency, and it will be replaced by the Chinese yuan.
From January 2012-January 2013, transactions in yuan grew 171% in value, moving the yuan ahead of the Russian ruble to 13th place in global currency payments, up from 20th last year.
And you can bet the yuan will soon crack the top 10. In March, yuan payments grew in value 32.7%, compared with a gain of only 5.1% across all currencies.
Part of the reason for the yuan's growth is that at least half of all trade with emerging markets could be settled in yuan by 2013- 2015, which would be up from just 3% in 2010, according to HSBC.
For Money Morning readers, the rise of the yuan shouldn't be a surprise.
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Why China Is Tunneling a Mind-Boggling 800 Miles in 2 Years
Would it surprise you to discover that China is planning to add 800 miles to its subway system over the next two years?
That's the distance equivalent to building a network from Dallas to Chicago in less time than the U.S. Congress can resolve a budget!
In 2015, when the out is complete, China's subway track alone will be a mind-boggling 1,900 miles, according to JP Morgan.
The Asian giant has been in the midst of constructing the world's largest transportation system, laying mile after mile of high-speed rail and subway track.
According to the World Metro Database, Beijing and Shanghai currently have the longest metro and subway systems, with about 275 miles each. The city of Guangzhou in China also falls in the top 10, with 144 miles of rail, beating Paris' network length of 135 miles.
This ambitious program is part of the pragmatic solution to help 1.3 billion residents move around the country efficiently and reduce the increasing problem of air pollution due to car emissions in big cities including Beijing.
The circulating reports and photos of Beijing's smog have recently become a dark cloud hanging over the country's remarkable achievements, but it's not a new issue. In the winter, smog conditions can seem much worse. Pollutants tend to linger when the air is heavier and colder compared to lighter, warmer air during the summer. In addition, the city is located near the Gobi Desert and has always been subject to sand and dirt storms, even back in the days when it was called Peking.
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These Mining Companies Will Profit from China's Good News
China announced industrial production data for October today (Friday), showing industrial value-added up 9.6% year-on-year, up from 9.2% in September and 8.9% in August.
This is great news for mining companies.
"Data out today provides convincing evidence that the modest macro recovery we've been anticipating is well underway," wrote Shanghai-based Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets. "Industrial value-added, power generation, retail sales and new home sales all improved in October, while inflation remains so low that it is not a policy factor."
Infrastructure investment in October was up 24.9% year-on-year, continuing the rebound begun in September.
Rothman explained, "...this infrastructure rebound is the result of the government fixing approval and financing bottlenecks for projects originally scheduled to be built this year, not due to a stimulus."
Looking at prices, industrial input prices fell by 1.7% year-on-year in October, an improvement from the 4.1% decline seen in September.
"We are starting to see a bit of a bump up in both input and output prices, which is consistent with our view that the growth rate of industrial inventory levels has slowed and a modest macro recovery is underway," Rothman concluded.
This has led some economists to believe that this increase in industrial production in China will be positive for commodity prices, including Li-Gang Liu and Hao Zhou who work for Australian bank ANZ.
If this is the case, it'll benefit the global "mega miners" that have seen their share prices tumble since the slowdown in China began back in 2011.
Mining Companies That Benefit from China Demand
BHP Billiton (NYSE: BHP), based in Australia, is the world's largest mining company and sells iron ore, base metals, potash, aluminum, metallurgical coal, thermal coal, manganese and oil products to China.
BHP is China's third-largest supplier of iron ore where growing stockpiles in China due to sluggish production had undermined pricing.
But this is starting to change.
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Will President Obama Be Able to Stand Up To China?
While U.S. Presidential headlines dominate the airwaves this week, there is another "election" under way thousands of miles from our own shores that may be even more important when it comes to your money.
The 18th National Party Congress is now underway in Beijing. Attendees are girding for a week of symbolic posturing and speeches, the culmination of which will be a new set of Chinese leaders and a new Chinese President for the next 10 years.
While this is a complicated process when things are running smoothly, this particular Congress is really critical. China is a mess. Recent economic challenges and corruption on a scale that has boggled even the most jaded of insiders are at the top of the "fix it" list.
Outgoing Chinese President Hu Jintao's replacement and China's presumptive new leader looks to be a man named Xi Jinping.
At 59 years old, he's a power player with close ties to the People's Liberation Army (PLA).
While he's not a military man per se, as the son of a revolutionary general he currently holds several significant offices that give him wide-ranging and very significant exposure to both the State and Communist Party.
What's significant about this is that there are three parallel strands in Chinese government structure: the Communist Party, State, and Military.
The Party and State are deeply intertwined, but the military is less so, except at the top levels of leadership. Consequently, China's new leader is intimately familiar with the Chinese military and also the likely new head of China's Central Military Commission.
I'm not so sure we've ever seen this exact combination before and I think it's going to challenge President Barack Obama in ways that he hasn't thought through yet.
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China's Pyramid of Power
China celebrated another achievement last week, as Mo Yan became the first Chinese citizen to win a Nobel Prize for literature.
The selection of Mo was praised by a Chinese nationalist tabloid as a sign that mainstream China could "no longer be refused by the West for long."
Mo grew up in Shandong province in northeastern China, and during the Cultural Revolution, he left school to work in the fields, finishing his education in the army, according to The Guardian. The author draws upon his rural upbringing in his novels, mixing historical perspective with mythical elements.
His real name is Guan Moye, but he chose "Mo Yan" as a pen name meaning "don't speak," to reflect the culture in which he grew up.
The new Nobel laureate is of the same generation as the new leaders set to take over the Politburo Standing Committee next month after the convening of the 18th National Congress of the Communist Party of China.
This group of men (and one female contender) are "old enough to remember the suffering of the Cultural Revolution, but also young enough to fully experience how China has grown through Deng [Xiaoping]'s opening of the economy to market forces," says CLSA China Strategy research.
They've seen vast political reforms take place, transforming China "from a country ruled by the contradictory personal whims of Mao to one ruled through institutions and rules," says William H. Overholt in The Washington Quarterly.
During these decades, "freedoms blossomed, affecting everything from clothing to haircuts to job or marital choices to social and political speech," says Overholt.
As a result of these policies, they've been able to witness China's incredible growth, with GDP averaging 10 percent per year and more than 500 million people moving out of poverty over the past 30 years.
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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?!
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Winning the Race for Resources
The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time.
I've read he's been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It's inspiring to see the incredible results of his tremendous sacrifice and commitment.
Investing in global markets requires the same sort of stamina, especially at times like this week, when the month's reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.
However, I believe there are encouraging pockets of strength to energize and inspire investors.
For example, we're coming up on the anniversary of the first stimulus move that kicked off the global easing cycle.
On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.
In June and July alone, there were nearly 70 moves-the most since the world began this massive easing.
Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred.
Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.
China Makes Its Move
But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they've recently announced acquisitions of Canadian resources companies.
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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.
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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
What's changed?
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.
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