The Weekly View: China: It's Built, Now Will They Come?
There is a raging debate regarding China. The bears see the investment boom of the last decade creating a property bubble that will soon burst. They also see excess capacity that will cause significant profit declines leading to a bear market in stocks and a major speed bump for China's economic growth. The bulls acknowledge the need for more consumption and less investment during the next phase of China's growth, but say that most of the investment will be absorbed by the rise of the Chinese consumer. They point to strong growth in productivity and real incomes, China's high savings rate and healthy government finances. Relying on Chinese government statistics (a potential problem) we find evidence of overinvestment but not of an asset price bubble. We are therefore willing to conditionally side with the bulls as long as the economy successfully transitions towards domestic consumption and away from exports as the primary driver of growth. In our view there is not enough external demand to justify the investments that have been made. We think a decision to allow the yuan to resume rising against the dollar, which seems increasingly likely, will be an important step in the right direction.
David Fuller's view Rod Smyth and Co mention the views of GMO's
Edward Chancellor (the bear case) and BCA Research's China specialist Yan Wang
(the bull case), in forming their own conclusions. At Fullermoney we spend a
not insignificant portion of our own research time assessing what are often
conflicting views. We wish to be familiar with the leading arguments in the
marketplace, before reaching our own behavioural / technical conclusions.
Inevitably, a forecast on China will be highly subjective. After all, it is a vast and rapidly changing country with well over a billion people and about which most of us actually know very little. Moreover, some people are pro China, some are anti China, some admire China and others fear China. These reactions are hardly surprising and if anything, are indications of China's importance.
Anyone who specialises in bubbles will find what they want in China. And some of us attempt to identify future bubbles so that we can participate in their development stages, while hopefully exiting in time. The best bull markets turn into bubbles. I am gratified that Fullermoney investment themes - Asian and resources emerging markets, mining shares, information technology, gold and industrial metals - have all been described variously as bubbles of varying degree.
What are investors to make of all this China bubble related talk?
We can conclude that it is partly true because China's government is definitely cracking down on property speculation. Using your own intuition, do you find that reassuring or a worry? I find it reassuring for the longer term and much preferable to Alan Greenspan's nonsense from the late 1990s about bubbles being difficult to identify. In the near term, measures to tackle a bubble in one area - property - are a headwind for equity (weekly & daily) performance. This will be a justifiable concern for investors looking for performance today, but a boon for those who wish to accumulate on easing and hold for the longer term, or at least until the next stock market bubble becomes apparent.
Meanwhile, for a number of months my main concern regarding China was the avalanche of IPOs which created too much supply. However these have now tailed off.
What about "a collapse of China's exports"? This was a big concern when everyone was preparing for a global depression, paradoxically leading to China's overly accommodative monetary policy which has been reined in recently. With the global economy continuing to recover, my guess is that China's exports are doing far better than anyone dared hope a year ago.
In a world of so-called "experts", I think we often undervalue useful anecdotal evidence. For instance, in the last few days I have considerably upgraded my household audio visual equipment, mainly to watch and listen to the latest blu-ray DVD recordings of films and operas. In a demonstration, some of the better equipment at sensible prices - amplifiers, tuners, speakers and cables - was made by the UK company, Cambridge Audio. I already owned some of their equipment but when I asked: How can this little UK company compete with the Koreans and Japanese, I was told: "They have great engineers and everything is manufactured in China."
In the equivalent of this 'chicken and egg' tale, which came first, China's need to export to the west, or the west's dependence on China's competitive manufacturing? As I see it, China can and does export to the world, including its own companies and citizens. Today, much of what the west produces needs to be manufactured in China, to remain competitive. I think this favours China's economy.