By Keith Fitz-Gerald
Money Morning/The Money Map Report
Tens of millions of people were heading home for the Chinese New Year late last week, as they do every year. But this year, an estimated 77 million people were effectively stranded by a record-setting snowstorm that essentially cut the country in two.
It was every traveler's worst nightmare, except that it was on a scale that we can't even comprehend here in the United States.
Think about it: Millions camped out at railway stations, and at transportation facilities for trains, airplanes and buses that were never going to arrive - and that were never going to leave.
Some of the stranded travelers were there for days in the frigid weather, sleeping outside on the ground, huddled in groups, or simply milling about in the car parks. A lucky few found warmth in emergency shelters. But even those, built to house as many as 50,000 people each, were soon filled to capacity.
The most recent news reports state that more than 100 million people were affected by the storm, the worst one that China has seen in more than 50 years. More than half a million homes were damaged or destroyed. Airports shut down, re-opened, and then had to shut down again when additional snow fell and airplanes iced up as they sat on runways.
On an icy stretch of highway in China's Hunan province, more than 10,000 vehicles were backed up in a gaggle that reached back nearly 50 miles.
At least 60 people have been killed. The death toll is expected to grow, as reports on problems, damage and injuries continue to roll in. The government has put the cost of the winter storm - so far - at more than $7.5 billion. After initially mobilizing several hundred thousand troops to ensure power supplies and jump-start traffic flows, the government has since doubled the number of troops it has deployed to nearly 1.5 million.
Food and fuel costs are rocketing upward. The government was forced to ration coal. As grim as it sounds, China's leaders say this mess will get worse before it gets better.
"The most difficult period is still not over yet," China Premier Wen Jiabao said during a weekend cabinet meeting. "The situation remains grim."
More Than Capitalist Bluster
This winter storm underscores a number of things. First, it demonstrates that China - despite its rampant growth and paradigm-shifting progress of the past several years - still has a long way to go in terms of internal infrastructure development. It also serves to warn the government and investors alike that social unrest could easily short-circuit the Great Growth Story of Mainland China.
But this also reminds us that every investor needs to have a China-investment strategy.
And here's why.
The one thing China fears most is social unrest and the snowstorm is fanning the embers pretty hard by testing the patience of citizens and governors alike. It's also exposing the latest schisms that exist between the newly affluent and the semi-literate migrant workers who manufacture most of the products that China peddles to the rest of the world.
In other words, in a bit of irony reminiscent of the U.S. economy of the 1800s, China is amassing its wealth on the backs of the very laborers that the wealthy elite despise, according to a report last week by The Associated Press.
Needless to say, that's a simmering problem that the government will go to great lengths to keep from boiling over.
That fear is pushing the government in new directions that we think are "encouraging."
For instance, CNN last week aired footage of China's premier standing in a Hunan Province railroad station, where he was using a handheld megaphone to offer an almost-unheard-of apology to waylaid travelers.
And the powers that be have allowed some pretty remarkable headlines to run, including: "Jiansu's Coal Storage Can Sustain Electricity Generation for Four Days and a Half."
And the China Business News has carried an atypically direct commentary that alleged that the power shortage was caused by government monopolies controlling railways, power plants and the power grid.
In an effort to hasten a return to normal, China's government has managed to persuade nearly half a million travelers to abandon their travel plans for this week's holiday and accept refunds instead - even though, for many, this will be the only chance they'll have all year to get home and see their families.
Investment Opportunities in the Wind
We are not so naïve as to suggest that Beijing is turning over a new leaf with regard to a sudden relaxation in media control, but the fact that they are allowing normally controversial headlines and stories to appear at a time when there is tremendous social stress could be setting the stage for more government spending as a means of appeasing the restless masses.
Assuming we're right - and history suggests that we are - this future outlay could boost China's gross domestic product (GDP) growth to an even brisker rate than the blistering 11.4% they reported for 2007. The fuel: The trillions of dollars that get unleashed as part of the high-visibility programs that are aimed at reducing social unrest even as they upgrade the company's infrastructure and maximize economic production.
And they'll need it. The damage estimate of $7.5 billion is certain to escalate. And the storm has spotlighted key infrastructure shortcomings that will now have to be addressed.
In the past, the spending has been targeted to critical areas such as power production, transportation and construction. This time around, we think it will also include market reforms that are designed to reduce the odds of the current crisis being repeated. And given that Beijing will play host to the 2008 Summer Olympics, which begin in early August [according to the official schedule, the opening ceremony is set for Friday, Aug. 8], we expect to see substantial capital outlays aimed at pollution-control initiatives.
This summer, for the first time, the world will get to see firsthand just how bad China's pollution problems have become. China's government will do all it can to minimize the problems it can fix now, and at least demonstrate that it has a plan to fix those that will remain [Editor's Note: For a brand new research report detailing the investment opportunities that Beijing's pollution-control initiatives are creating, please click here].
Investors seem to agree with our assessment that this flow of capital will be creating profit plays in Mainland China: Indeed, China's main stock index soared a record 8.3% yesterday (Monday) "on speculation the government will act to boost equities and stimulate growth after the worst snowstorms in decades closed transport networks and shut factories," Bloomberg News reported yesterday. Chinese stocks had more than doubled last year before the impact of six interest rate increases and a clampdown on bank lending led to a retrenchment in share prices.
While the bullish response in share prices was nice to see, we still believe that current market conditions call for caution.
Global equity market problems have weighed heavily on Chinese stocks since last fall and we don't expect those business problems to disappear anytime soon. So while we're still huge believers in China's long-term potential, we're cautious about heavy direct investments in China shares in the near term [although there are some notable exceptions].
History suggests that until the current credit crisis blows over and the markets gain confidence, it is far better [and far less risky] to place bets with companies that are doing business with China, even though they may not be based there. Indeed, by investing in companies that are poised to profit "because of China," but that aren't necessarily "in" China, we benefit from China's gains but enjoy the safety of more-heavily regulated markets - such as the United States and Europe.
The Beijing-based Huaneng Power provides electricity to virtually all of China's East Coast, including some of the country's fastest-growing areas. Although it's based in China, and initially seems to contradict our "safety-first" China investing strategy, there's a very good reason it made our list: Huaneng Power is working closely with the government, and has the inside track on key deals at many different levels.
You see in China, such contacts are a key element of who gets contracts and how business gets done. These "connections" - known in Chinese as guanxi [pronounced gwan-shee] - usually separate the winners from the losers. Hence Huaneng Power is a much less risky investment than it initially appears.
The Zurich-based ABB (ABB) is winning China contracts left and right, and is part of projects to provide everything from tie-in gear for electrical grids to construction of the power-transmission lines that actually deliver electricity to millions of people.
And don't forget London-based premium liquor distributor Diageo. Thanks to the emergence of new economic middle and upper classes in China, the demand for luxury goods is escalating on a global basis. That's one reason gold has spiked. In China, upscale liquor consumption is growing as fast as the Chinese economy, and the company's double-digit sales growth there adds to overall earnings expectations.
Speculative investors who want to make this a round trip by taking advantage of any weather-related downturns over the next few months could also pick up the ProShares UltraShort FTSE Xinhua (FXP). This inverse fund actually appreciates with each drop in the iShares FTSE/Xinhua China 25 Index (FXI) exchange-traded fund (ETF), against which it is traded. The FXP fund has appreciated 53.85% since December, while the U.S. Standard & Poor's 500 Index has dropped 12.28%. And that bellwether U.S. index appears set to drop even more.
Guess our tongue in cheek saying, "go global or go home" has some bite... even if it is to the downside.
News and Related Story Links:
- The Associated Press:
Chinese workers suffer in snowstorms.
- The Associated Press:
Train woes ease in snow-wary China
1 Million Troops for China's Blizzard Relief
- Bloomberg News:
China's Stocks Rise by Most on Record; World's Biggest Mover
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.