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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 Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
Just a great article article. I really agree with the thoughts on long term thinking and planning and on the polotics of communism. I have printed this and plan to re read it periodically.
Keith,
You have a vested interest in this commentary as you've been blowing the China horn for so long. China is a great story, but there is a bubble there, and just because they #2Ts, it doesnt mean they won't get hit hard. What happens if during the collateral damage, the USD gets hammered (which it may do so anyway for other reasons), their 2Ts won't shine so well. The world economy is still structured like a pack of cards, a small crack somewhere and China may discontinue buying US debt, the US Govt will be unable to print money without causing massive inflation which may spiral out of control eventually. At the end of the day, some small unexpected trigger will cause the next global crisis because the root cause problems of the previous crisis have simply been shoved under the carpet, and it will resurface again very soon.
Bubble Schmubble. The difference that will keep China from making the huge dumb mistakes recently made by most western countries is – China's politicians do not have to pander to any special interest groups or anyone at all.
If China's leaders want to change something they change it. If they want to build/tear down something they do it. If they want to drill for oil, develop a new mine, raise/lower interest rates, burn coal, change a law, force workers to work for next to nothing – they just do it.
We may not like what they do, but those are the reasons China is not in a bubble and will not be in a bubble.
At last! Some sensible commentary rather than a load of blather. It doesn't offend sensibilities, it should be core reading material for anyone wishing to understand the story behind the story. My congratualtions!
China may be a little overvalued at this time but to short would be like shorting the NASDAQ in early 1999.
Spot on. The Chinese have a totally different worldview from Westerners, and most Westerners just don't get it. For them, the timeline is generations, not weeks or months.
Sensibility never fears sensitivity! Being sensible is better than being sensitive. The American ego (or sensitivity) will do well with a little humbling.. As the saying goes, pride comes before a downfall. China is driven to grow its economy and build up their own country under the concept of "peaceful rise". No amount of prejudice against it by the western powers will stop it. The world power structure is being rebalanced. This needs a lot of sensibility – meaning we need economic, fiscal and monetary policies that are prudent and certainly not the type which has been driving USA for so long.
China has good long term prospects and no one should short China in the long run. But, I don't share the enthusiasm of Keith on China as of now. There is hot money and bubbles in real estate. Just today, CNN reported that property prices have gone up by upto 75% in places like Shanghai in just one year… what justified such an increase?
I'm shorting China as of now and will continue to do so till I see that the infrastructure that China has built (and is still building) has effective utilization (not for exports, but for internal consumption by Chinese).
I'll buy China when HSI hits 15000 or lower…till then, let Keith enjoy his China investments! :)
We should be in such rotten shape as China with growth over 10% and billions in reserves.
Good article it may offend Amercians that want to remain in a State of self denial.
The Chinese leadership have sucessfully stripping the west from its Industrial base, and the US perhaps in 30 years will return to an Agriculture based economy.
They should be thanful to the US government for creating an incentive for Amercian Companies to leave the US to elevate profits at the expense of the Amercian middle class.
Your article confirms a [the?] key difference between China and USA is that much of China's planning is long term whereas much of USA's planning has been short term for several decades. The MBA programs of our most highly rated universities have inculcated a short term focus into many of our leaders.
it is true,china blooming to a degree,with their over pouplation they have importing people from out side china ,my friend kid 25yrs old has visited china for corp duties and learned the mandrin and came back home that he couldn't find a job ,college grad,he found two offers in china for work ,Amazing at home there is no jobs but abroad there is,I say all power to him leaving his every thing behind and went.
Your assessment of China's long-range planning and foresight is right on target. It is unfortunate that the US industries have been geared to eating their seed corn while trying to make the next quarter's bottom line look good. We have lost much of our research and advanced development capability because of the rather foolish notion the corporations couldn't afford to keep it up. Unfortunately we could not afford not to, and now our leadership is steadily losing out. Lack of long-range planning, and the courage to take the near-term steps to achieve that, have only aided heavily in the losses of our manufacturing capabilities. Stop the research and advanced development and you have little to manufacture. Our situation is not all do to cheaper labor overseas; we've done a lot of it to ourselves. We need some major long-range programs; perhaps a NASA-like effort to really rebuild our energy generation and infrastructure for one, where all the energy options are put together in a parallel effort, putting massive number of jobs back into the work force. We just keep going along letting special interests stop this long-range activity to really happen.
I don´t see reasons for things not developing like Keith wrote.
When Japan appeared, it caused some imbalances as to US and Europe produtions and exports. Then came China, and I don´t see reasons for China not achieve two and three times Japan GDP, in the future.
And that impact of China output, plus that of India, Brazil, and others will deffinitely and deeply shape the world as to investigation , techonological development, the share of( or fight for ) raw materials, energy sources, wealth distribution, etc.
I have no doubt China will face some troubles too. But the fact is that their potential is there and they seem aware of it, and they show competence to deal with the magnitude of the challenges.
Besides, it also seems to me that political control of the process is much more efficient to their scale than a plain democracy as we know it in the west. In terms of foreign policy, they are smart enough for not looking for troubles as the US do, and therefore not creating unnecessary enemies. Many hate to recognize this, but that is the way things will go.
We only wish we had the ability to do what the Chinese can. They think long term, where we are a must have now society.
I liked the comment from Jim Rodgers about being in France in 1807,U.S. in 1907 and China in 2007.It shows how the center of wealth moved from Europe to the U.S. and now to Asia.I suspect that China will have financial setbacks,like the U.S. when it was the leader,but longer term China is where the action will be.
Excellent article, your commentary is insightful and eye-opening. However, there is a significant error in the final paragraph, an error that is common, but nonetheless disconcerting from an idealogical perspective.
As many people do today, you have incorrectly mixed political and economic terms. The words Communism, Socialism, Capitalism, Democracy, Fascism, andTotalitarianism are not all points on the same continuum. The first three are economic systems; the latter three are political systems.
You stated the following: "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. " This is an extremely deceptive statement, which seems to imply that China is practicing capitalism. They are not.
In fact, no one, East or West, has declared democracy and capitalism as two sides of the same coin. There are many other political systems that can combine with a capitalist economic system. The West has simply correctly identified democracy and capitalism as the preferable options.
However, what is completely incompatible in your assertion is that China, an avowed communist state, has adopted capitalism. These two systems cannot coexist. Communism has proven incapable, in the long term, of "creating wealth." Even in this short term where Chinese Communism will create wealth, the wealth is held and controlled by the government. The definition of communism is an economic system where the means of production, and the products thereof, are controlled by the government.
The relativistic use of terms such as "chinese businessman" lead casual observes to soften their view of the Chinese system. Unlike a western businessman, the Chinese businessman does not reap the rewards of his ingenuity, and does not risk his own economic resources. Cultural pressures replace economic incentives. Shame replaces dollars as motivation.
We must remember that the Chinese Communist Dictatorship still, as a tenet of their belief system, actively thwarts the people's impulse to improve their conditions, be it economically, culturally, religiously, or socially. The West does not demand democracy as a standard, but it must demand freedom as a standard.
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am i the only one that sees that the $2 trillion China has is a direct result of all the U.S. sends their way? At what point will we as a country stop 'feeding' all the other countries of the world and start to feed our own. Of the milliions of jobs lost in our country — it is because everything from our cars, to our clothes, to our food/fish, to our own American flag are sent off to China to produce. I only hope it isn't too late for our children, grandchildren and beyond to actually belong to the Chinese government. Oh said, our government and each of us isn't taking the time to look at what is in our own backyards.
Oh, OK, but WE'VE got the world's highest military spending, two interminable foreign wars at the same time, and troops in 108 different countries (or whatever it is)! What's infrastructure creation and a $2,000,000,000,000 cash kitty (2 trillion with all the zeroes written out!) compared to all that? Apparently the Chinese will have a national public health insurance system before the USA ever does, too.
During the 30 years of near continuous growth in Korea, we experienced four times of real estate bubbles. The average real estate price jumped each time by about 300 to 400 %. However we never experienced burst of any of these bubbles because of the simple fact that real estate supply is fixed and the price jumps as more liquidity becomes available to the community.
Rapid growth is always associated with mild inflationary condition and people knew that real estate is the best protection against inflation. Korean finacial sector was, however, basically a closed economy during the most of high growth period, and China is very open for portfolio investment and speculative investment. And real estate supply of China is far more flexible than in Korea. My feeling is that except in the center of major cities of China, the real estate bubbles will have to burst from time to time.
Great points!!
I agree it's just a correction, and trigerred by goverment force plus background situation, which is a right lead for now. Anybody go there to see and understand what's happenning would realize the points, the key is it's the most powerful growing economic nation right now.
Any markets are always up and down, and my prediction for current China stock market is between 2900-3500 shaking for a while. Let's see how we can profit from it is most important.
I have worked in china for many years, The growth is just amazing, They plan for the future not just a few years or until the next election. and its huge plans, i think the last big plan in the States was the Hoover Dam. They are leaving the whole world behind. And people thats a fact!!!
Anyone interested in global investing is doing themselves and their families a disservice not visiting China and see this country up close and personal. I spent 3 weeks there last year and visited their major cities. It was the most eye opening experience of my life. I am 65 and have been all over the world. IMHO this is the most capitalistic country in the world. They have no crime and no welfare. If you are unproductive you don't eat. Commit a serious crime and you also don't eat ever again. Try to imagine what the US could be with no crime or welfare and the liberals wanting everyone to be a victim and letting the nanny state take care of you.
Barry –
Everything you have said about "here" is right – commit a serious crime in China and you are never seen again. Be unproductive, and you do not eat.
I have lived here for close to two years in Shanghai and I have traveled to almost every corner of China, and I too was enamored by their ability to DO — for a short while. It is very refreshing coming from the US and seeing streets be redone in a matter of days and buildings go up in a matter of months. Its refreshing to see murderers sent "away" and the wastrels of society not living off of the "do-ers" tax money.
However, what you (and most people) fail to grasp on your three week or one month or six week trips galavanting around China is that the definitions of serious crime and what leads to the have-nots of this society "not having". A serious crime in the country can be anything from stealing a loaf of bread in some areas to murdering your Neighbor.
The problem is there IS NO JUSTICE SYSTEM. No protection for citizens. Everyone lives in fear, including me as an ex-pat. All the while migrant workers are being executed for stealing Ipods while the richest men in china, and even the middle class small business owners, are receiving and giving kick backs and bribes in the amounts of 100 of millions of RMB every single day. You cannot do business here without getting your hand very, very dirty and that is not capitalism to me.
To that point, I have watched my friend beat to within an inch of his life because he offended the wrong person… and when we called the police they watched while it happened. Moreover, to my point before about murdering neighbors, a man was just release for jail after 15 years when the neighbor he murdered suddenly showed back up for a government hand out only available in their hometown. It was a government sponsored conspiracy in shenzhen against the guy put away because he refused to move his factory.
If you did more than just took pictures and boarded airplanes in China, you would probably see it in a little bit of a different light.
I will thank China for one thing; I have a new found respect for freedom of speech, government, regulations, police officers, and the justice system. Things we take for granted, and more often than not protest against and bitch about, are sorely missed when they are taken away.
It is always amusing when otherwise intelligent people call present day China communist. By what measure would you call the most successful example of capitalism in the past 20 years collectivist, communist, or even socialist?
As to China's long term future, building infrastructure and planning ahead to encourage growth can certainly produce better results than the bankster kleptocracy clusterfuck that the USA is saddled with. But in the long run it can't triumph over the laws of physics and mathematics. Exponential growth of anything– population, energy use, automobile production, or an economy is physically impossible. At a 8% growth rate, it takes less than a century to leave only one square meter of the earths surface for each human or automobile.
The maximum amount of oil per year that will ever be produced from the earth's finite resource is 85-90 mbd, and that peak likely was reached 2 years ago and has plateaued or is on a downward slope. If China's population were to reach the US standard of auto ownership it would require they use all the worlds' oil supply or that the cars never drive anywhere on all those new roads being built. Perhaps they could serve as residences like they now do in the US for people forced from their homes by foreclosure.
China gets 70% of its total energy supply from coal, and at current rates of growth will reach its maximum peak in terms of energy content within 15 years. Imports from Australia can't begin to fire all the boilers under construction. There is no way that any effort to develop wind and solar can fill the depletion gap and support continued growth in energy production in the time frame available.
Fossil fuel energy is the lifeblood of industrial society and agriculture, and without growth in energy supply China's industrialization has no possibility of continued long term exponential growth no matter what its leaders do.
Its hard to think long term when you are worried about the next election, unlike western democracy China does not have this restriction. It is time for western politicians to stop being selfish and think of their countries future and kids. Such a brave person would be suprised by the support of the masses as most voters think long term and want to leave the world a better place for the next generation. Long term thinking is the key to sustainable prosperity.