China: Trade of the Century

Long term (40+ Years) I am an absolute bull on China. It’s a big country and it’s going to get bigger. If you can close your eyes and wait 40 years to look at your investments, don’t read this. Just buy China.

However, if you’re concerned about rate of return over the next 10 years or so, I would bet on the downtrodden USA market. When everyone already agrees on something (whether positive or negative), that is usually the time to ask if the traditional wisdom has finally gone too far and we’re ready for a correction.

When thinking about current asset valuations, remember that the “Rise of China” was the biggest online story of the DECADE, outpacing the number two story (Iraq War) by 400%. See the full list.

Burton Malkiel, professor of economics at Princeton did an interview on FOX Business TV called “Betting on China”. Malkiel is a leading proponent of the efficient market hypothesis. If this guy is bullish, that might be reason enough to short. Reasons for bullishness include:

Large Labor Force: With a population exceeding 1.3 billion people, China has plenty of labor available to expand GDP (Gross Domestic Product).

However, China’s had a big population for a long time, but it’s been poor for a long time. India has a large population (1100M) but per capita numbers are still low. Russia has 140M people and the workforce is highly educated, but they’re only exporting natural resources. Japan has around 130M with GDP per Capita of $33K. The USA has over 300M with a GDP per Capita over $47K., and Singapore slightly above the USA average with $51K, though only 4M people.

No Nonsense Government: An authoritarian government has its advantages. While pornography and unrest may be problems, infrastructure projects are not.

Thoreau first said that”The Government That Governs Least is the Government That Governs Best”. How did the Central Planers in the USSR perform? What happened to the magic of METI (Ministry of Economy Trade & Industry) in Japan? How would we expect central planners in a bureaucracy even larger to do a superior job?

Both Markets and Planners allocate resources. Do you trust the few or the many?

Education: Chinese culture values education. As a result, China is slowly moving away from its roots as the globe’s manufacturing and piracy capital. Intellectual property is appreciated more now that China is becoming a leader in emerging technology areas, such as solar power.

Most of the Profit in exports from China is derived from Design, Process Management, Quality Production Standards and Marketing managed by firms from developed nations. With the exception of a few State Owned Enterprises, purely Chinese products marketed to Chinese people are typically very poor quality and not ready for competition on international markets.

Trade Surplus & Currency Reserves: Must be nice to have trade surpluses and massive currency reserves (~$2.3 trillion). This is what happens when you are in a position to export more than you import.

Manageable Debt: China’s Debt/GDP ratio is less than 25%. You can compare that to the U.S. approaching 100% and Japan at over 200%. Disciplined fiscal management provides the Chinese government with more options in dealing with the global slowdown (e.g., stimulus).

This is the big hidden issue with China. The numbers we read are that there’s only 25% Debit/GDP ratio, but there is way too much infrastructure investment in glamourous conference centers, hotel high rises, vacant luxury apartments and bridges to nowhere for this number to be real. The real number is likely 75-150% of GDP.

Long Runway of Growth: China’s long runway of growth has allowed it, and should continue to allow it, to grow at above average growth rates – in the 3rd quarter of 2009 the Chinese economy grew at a very healthy +8.9% rate.

Interesting that consumption numbers for China are down. Sales of gasoline are down. People everywhere are spending significantly less money, and yet GDP will grow at 9%. Growth numbers during the Great Leap Forward looked great too! However, 2005-2009 will likely prove to be China’s Great Leap Backward.

Newsweek’s Why China Won’t Rule the World ended with the apt:

Of course, the Chinese are thrilled that everyone thinks they’re the biggest winner. The truth, however, is that they’re more like the least-bad losers—and they know it.