The first rule of successful global investing - to paraphrase the words of New York Times columnist Thomas Friedman - is a simple one.
Never short a country with $2.3 trillion in currency reserves.
I'm well aware that bond king Bill Gross has been sounding the alarm about a China bubble, and that Forbes magazine is predicting a major meltdown by the Asian giant. I've also heard all about noted short-seller James S. Chanos - who made his name by correctly calling the Enron Corp. demise - who recently described China as "Dubai times 1,000 - or worse."
Just yesterday (Wednesday), in fact, U.S. stocks suffered their worst beating of the New Year on fears that new bank lending curbs in China might blunt the worldwide economic rebound. Asian markets also were down yesterday.
So what's really going on here? China is making its banks tighten credit. Some of the biggest banks, I've heard, have actually suspended loans for the rest of January! Many analysts and media pundits believe this is the beginning of the end of the Great China Growth Story.
Don't believe it.
In fact, if anything, the moves that China is making amid so much criticism are actually going to solidify the long-term future of the world's No. 3 economy. The bottom line is that China's leaders are focusing on financial-crisis solutions, while their U.S. counterparts are still trying to figure out what kind of financial train wreck hit us.
In recent months, for instance, Beijing tightened the screws on real-estate speculation. It has raised interest rates, boosted reserve requirements and devised some stock market changes that are aimed at limiting stock-market speculation.
In another shrewd move, the Chinese government has started to diversify its reserves away from the weakened U.S. dollar, broadened trade relationships with seemingly everybody but the United States and even nailed down some yuan-based currency "swap" agreements that should help it avoid some of the massive exchange-rate risks that could derail China's recovery.
The experts who are right now trying to write off China are making a very basic mistake: They are confusing short-term corrections with a long-term change in direction. And the two scenarios are very different. China's growth is just beginning. Indeed, as measured by per capita gross domestic product (GDP), China has made more progress in a mere 30 years of market reforms than it has in the last 2,000 years. Then there's the conveniently overlooked fact that China has had the world's largest GDP for 18 of the last 20 centuries.
China is a land of raw opportunity. Over the long haul, in fact, it's the greatest wealth-creating opportunity that we'll see in our lifetimes.
If anything, I think the typical individual investor should double their exposure to China while they still have a chance: Do you really want to find yourself standing alone on the dock, left behind to lament your lost opportunity as you watch this great profit opportunity sail away? I don't.
Let me relate to you something that legendary investor Jim Rogers recently said to me about China: "In 1807, if you were smart you went to London. In 1907, if you were smart, you went to New York. And, in 2007, if you were smart you went to China."
Will there be hiccups along the way? Absolutely. And some will be substantive. But here's the thing: Beijing isn't concerned about the short-term on anything more than a cursory basis. China's leaders know that the trillions of dollars the country is investing and spending now are setting it up to be a world leader for the next century or more.
That's why we are seeing such laser-like intensity when it comes to infrastructure spending, pollution control, technology development, medicine and alternative energy.
I've been making annual excursions to China for a number of years now. It was just a few short years ago that I would see roads that went nowhere and bridges that weren't connected to anything. There were rail lines carrying no trains and airports with no planes. On the surface, it appeared to the casual observer that Beijing had lost its mind.
But the truth was that Beijing had a plan. And it was a grand one.
The profit opportunities are in plain sight - virtually everywhere.
In one five-year project, China is connecting more than 12,000 miles of high-speed rail lines at a cost of more than $200 billion. Compared with that, the $36 billion U.S. high-speed rail appears more like a model railroad than a modern railroad.
Over the next decade, China is planning to build a dozen airports the size of Los Angeles International (LAX) or bigger. And there's a highway-construction program under way that will put our crumbling national interstate system to shame.
Every two years, China is completing a power-distribution system that's the equivalent of Britain's national electricity grid. At the same time - unbeknownst to most people - China has also made itself into the world's largest investor in alternative energy and pollution control.
And despite the current spat between China and Internet-search heavyweight Google Inc. (Nasdaq: GOOG), China is increasingly becoming an online nation. China's Internet users - all 400 million of them - already outnumber the entire U.S. population of 330 million.
Then there are the so-called "returnees." In the early days of its market reforms, China actually offered a "bounty" to induce foreign-educated, foreign-certified Chinese to return home. But now those same folks are returning home voluntarily. Some are financial experts. Others are doctors, lawyers, engineers and professors. Many are finding top-level employment in China's leading companies and, in the process, filling in the knowledge gap that China has suffered to date. It's not necessarily national altruism that's drawing these folks back to their homeland, either.
It's opportunity. These people understand the market reforms that are taking place, and seen the wealth-creating opportunities that will result, firsthand.
People hate the fact that China is communist without really understanding that we're the only ones who have decided that democracy is a prerequisite for capitalism. Chinese business people have decided that communism works just fine when it comes to creating wealth. Especially when Chinese communism is so very different from the Soviet menace of our childhood nightmares.
If this column offends your sensibilities, I'm sorry.
I'm still not "shorting" China.
[Editor's Note: Twenty picks. Twenty winners. For the past year, Money Morning 's Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. Every trade turned a profit. That's remarkable in any market, but given the current circumstances, the service offers unparalleled security and profit opportunities. To find out what other investors have to say about the service, as well as the secret ingredient that makes the Geiger Index go, read on.]
News and Related Story Links:
- The Wall Street Journal:
China Shares End Sharply Down On Fresh Lending Restrictions - Forbes:
The China Bubble
- Los Angeles International Airport:
Official Web Site
- The New York Times:
Contrarian Investor Sees Economic Crash in China - Money Morning:
China is Doing Exactly What the United States Should be Doing - Looking Ahead
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.