By Mike Caggeso
Seemingly under the radar, China's Shanghai Composite Index has risen 17.7% since Nov. 1.
Specifically – and not coincidentally – the index began its rise Nov. 10, the day after Beijing announced an ambitious economic stimulus plan that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over the next two years.
It's this focus on developing jobs and infrastructure, or "new material product" – absent in any similarly focused U.S. stimulus so far – that will keep China's economy on the fast track economically, while also helping boost the Red Dragon's ailing stock market.
China's governmental policies famously (or infamously) favor specific state-sponsored companies – especially the infrastructure companies Beijing deems integral to the nation's physical renaissance. And a large portion of the stimulus money is expected to go right into the coffers of these companies.
Stocks have responded accordingly, advancing an additional 11% last week. The Shanghai index extended those gains yesterday (Monday), climbing 3.6%, or 72.11 points, to close at 2090.77, as investors held out hope that additionalfollowing another high-level government meeting in China this week, The Associated Press reported.
Further fueling investor ardor was Beijing's declaration that it would not be investing in troubled Western financial firms any time in the near future.
China's $200 billion sovereign wealth fund, China Investment Corp. (CIC), has lost roughly $6 billion of the $8 billion invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. Lou Jiwei, the company's chairman, last week rejected the notion of putting any more of the government's money into banks outside of its homeland. And he did so citing an overwhelming fear.
"I don't dare to invest in financial institutions now," Lou said last week at a conference in Hong Kong, Bloomberg News reported. "The policies of the developed nations on these institutions are not clear. Until they are clear, I don't dare to invest in them. What if they go bust? I will lose everything."
China has a long history of doing things on its own terms, says Keith Fitz-Gerald, Money Morning's investment director and editor of The New China Trader. But before you label China's back-patting and trash talk as propaganda, step back and consider which of the two you'd rather invest in: A disheveled U.S. market, or infrastructure development in China, the fastest-growing economy on the planet?
Investors have chosen the latter.
"In such uproar, it's not clear how much is bottom fishing versus bottom building," Fitz-Gerald said of the Shanghai index's recent run up. "However, the fact that many Chinese companies have superb numbers is undeniable."
Following China's State Investment Cycle
Unlike in the United States, and many other Western economies, consumerism isn't the main engine of China's economy.
Rather, it's the government – a running tally Fitz-Gerald has labeled as "China's state investment cycle."
About 70% of China's economy is driven by state investments, with consumers filling in the other 30%. For the United States, those ratios are reversed, Fitz-Gerald says.
The recent $585 billion stimulus plan is just one of several gigantic investments the Chinese government has made (See chart: New Material Product). Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, tourist attractions and more.
There are three things to consider here.
First, China is in the midst of one of its largest state investment cycles ever – generating streams of profit never before seen.
Second, when China spends big money, it feeds the companies big enough and capable enough to handle the job. It will be those companies on Beijing's short list that rise to the surface in the next few months, Fitz-Gerald said.
And third, despite consumers driving only 30% of its economy, China has the largest middle class in the world at 300 million people. What's staggering about this is that they are only starting to spend their growing wealth. So when these state investments give consumers more income to spend, the only problem the government will have is keeping economic growth from getting out of control.
'Aimed at Growth …Adding to GDP'
But before getting too far ahead of the current reality here, let's return to the Shanghai index's rally. Much of it has been driven by clear signals that state investments will continue.
As of now, the index is nearly 67% off its October 2007 high. And that proves two things:
- First, China's biggest companies have been severely affected by the global economic crisis.
- And second, they remain some of the cheapest stocks in the world.
The bottom line is this: The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman Sachs Group Inc. (GS) predicts.
On the other hand, analysts predict China's GDP will grow anywhere from 5.0% to 10.0%, easily making it the world's fastest-growing economy, no matter where it lands in that range.
Fitz-Gerald believes the direction of China's GDP is evident in the direction its government thinks, at least economically. And if there's one thing that pares down each country's economic thinking, it's a look at each their recent economic stimulus packages.
"The U.S. government is running around rewarding bad behavior," Fitz-Gerald said. "China's package is aimed at growth, creating jobs and adding to its GDP."
News and Related Story Links:
- The Associated Press:
- Money Morning:
China Slams Western Financial Firms
- Money Morning:
Will the Loss of Consumer Credit Serve as the Next Economic Aftershock to Further Fuel the Financial Crisis?