4/18/2013 10:45 PM ET|
How to profit from China's slowdown
Slower growth in China is intentional, and aimed at avoiding a speculation-fueled crash. Investors can still benefit.
OK, I know the news that China's economy grew at a slower-than-expected 7.7% rate in the first quarter -- combined with worries about a deepening recession in much of the eurozone and a U.S. economy that might itself be slowing -- knocked the stuffing out of stocks on Monday. And that the China news looks like it broke the momentum of the recent rally, at least for now.
Believe me, I'm not fond of drops of this magnitude.
But . . .
In the slightly longer term, I think this slowing in China's growth rate is good news. You see, I think it's intentional (which means a return of fears about an unintentional hard landing aren't justified).
China's government is trying to slow its growth rate because it's afraid of setting off another bout of real estate speculation, of increasing the flow of hot money into China's economy and of the rising tide of Chinese borrowing and debt, especially at the local level.
Investors around the world who decided they could count on China revving up its economy again to 9% or 10% growth were indeed disappointed. They'd placed their bets, especially in the commodities sector, based on those expectations. And when those expectations weren't met, they sold and sold.
But the only way China could meet those expectations is to go back to the old days of stimulus, stimulus, stimulus, based on massive spending on infrastructure and other hard assets and financed by loans that stood almost no chance of being repaid.
China faces a choice -- a slowdown today or a crash tomorrow. And I think China's new leaders have picked "slowdown."
Consider the alternative
Now, like most medicine, this one isn't the tastiest thing to swallow. It means global expectations will have to be reset in sectors from metals to luxury goods to fried chicken. China's decision to go slower isn't going to make everyone inside China happy, either, even if it is accompanied by a rebalancing that points more of China's growth toward the country's consumers.
But considering the alternative -- a possible developing-economy bust fueled by cash from global central banks -- I think this is a medicine that should be swallowed.
I'm going to quickly lay out the case that this slowdown in China is intentional, and suggest three ways it changes the investing landscape.
In China it's not just what is said, but who says it. So, when earlier this week Zhang Ke warned that local government debt was out of control, it was a big deal.
Zhang Ke isn't some minor official in the ministry of something in Beijing. Zhang founded and heads ShineWing, China's largest Chinese-owned accounting company. He's been vice chairman of the Chinese Institute of Certified Public Accountants since 2004, and in 2005 he was voted one of the country's top 20 accountants by China's Ministry of Finance. He's taken ShineWing to Hong Kong, Singapore and Australia -- and, quite frankly, you don't get to be the flag bearer for China in the international markets without a nod from Beijing.
Zhang's warning comes on the heels of a downgrade of China's credit rating from Fitch Ratings. And on Tuesday, Moody's Investors Service cut its outlook -- not its rating -- from positive to stable. The Chinese government's knee-jerk reaction to criticism like this from outside organizations is usually to circle the wagons, deny the existence of a problem and blacken the name and motives of these critics.
This time, however, Zhang piled on. Local government debt is "out of control," he said, according to the Financial Times. ShineWing had all but stopped signing off on bond sales by local governments.
"We audited some local government bond issues and found them very dangerous." Zhang added. "Most don't have strong debt-servicing abilities. Things could become very serious."
And, he said, "A crisis is possible, but since the debt is being rolled over and is long term, the timing of its explosion is uncertain."
Add in recent steps by the People's Bank and the Beijing government to rein in real estate speculation by raising taxes on profits, as well as efforts by the central bank to withdraw liquidity from the economy to offset inflows of money from overseas, and you've got a government that seems determined to live up to its rhetoric: These are the actions of a government that believes the days of double-digit economic growth are over.
A changed investment landscape
I'd suggest three ways an intention to live with 7% to 8% growth changes the investing landscape.
First, not everyone who has some claim to a share of the pie as it has been divided is on board. In fact, I see signs that this stance by China's top leaders has set off a scramble among the politically connected to grab for economic advantage. If the pie is going to grow more slowly, these members of the country's elite are going to try to get a bigger share of it.
This is the common thread, to my mind, that connects such seemingly random events as the attack on Apple (AAPL) -- orchestrated by the official China Central Television that claimed the company offered skimpier warranties in China than elsewhere in the world -- and efforts by China's big telecom operators to either slow the growth of Tencent Holdings' (TCEHY) WeChat mobile phone application, or to grab a slice of the revenue by forcing Tencent to pay for the bandwidth that its 300 million subscribers use.
Politically connected state enterprises -- and no companies in China are more politically connected than China's state-owned China Mobile (CHL), China Unicom (CHU) and China Telecom (CHA) -- have a long tradition of using their connections to reorganize the economic playing field to their advantage.
The preliminary evidence points to an increase in this kind of political jockeying that will make it even harder for investors to figure out what any stock is worth in China. How do you factor in the possibility that a state-owned enterprise will grab a hunk of the revenue of the business you've invested in?
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How to ACTUALLY profit from China's decline. Remember how we started down that slippery slope? We threw out, donated or discarded nearly all of our well-made fully-functional goods and paid good money for cheap knock-offs. The more it became popular to boycott mom and pop and shop until we dropped at a big box, the fewer jobs there were (I commend South Park for all their lampoons that depicted these scenarios so well!). We will PROFIT from China's decline by reducing wages for paper and button pushers to $1/hour and restoring American Made Quality and Free Enterprise. If you can't do math without a calculator, if you can't set a budget and live through it, if you have a degree or two or six but couldn't make it in self-employment if your life depended on it... get the F out of America now because you WILL NOT MAKE IT in the coming economy. Look UP, stop TEXTING, lose your i-Phone and find both a work ethic and craft or skill that makes something out of nothing, not nothing out of what used to make our nation prosper. We owe you nothing. Go do something. China has a thousand times our population and can't motivate it. That's not a problem, its opportunity.
One thing I will always say about Mr. Jubak. He's got skin in the game.
If I had extra funds to invest right now, I'd buy real estate, and at least one spot that could be used for self-sustaining farming, and a little gold and silver.
"It's not that I agree with the premise of speculation in commodities for profit - it's that I would think that when stocks tank and while real estate is still shaky, gold and metals would seem to be more attractive purely from an investment standpoint."
Very commonsense. Unfortunately, sense only works until extenuating circumstances make theories reverse on themselves. I use the word "bandwagon" to describe it best... too many people invested in the same thing with a few or less majority players who can and will fix the sell price, make investment potential toxic. Gold is only worth what someone will pay for it. If no one wants it, the value is zero for sellers. As economic safehavens fall, a bunch of gold-hoarders will emerge and do... what? People aren't going to start buying it at nosebleed prices if there aren't jobs or currency. Toilet paper would be a better investment IF you had a warehouse full of it. I think everyone has a right to worry... stocks have no basis, so they could indeed fall to zero. We no longer have the stuff to sustain us so no business platform is worth investing in. Real estate is still a roof over your head but the sheer number of non-owner-occupied homes that will be abandoned without renters who have rent money will trash that market. There is only ONE thing that can offset all this crap brought on by deadbeat paper and button pushers... terminate them from the jobs they stole and restore those jobs to the people who did them before 2009. Pay them well and freeze all executive every thing and we regain a buying pulse. Don't forget the most important lesson from history told to us by Nero as Rome burned... first, we kill all the lawyers. Eliminate legalese, restore free enterprise. It doesn't look promising for people who's only skill is delegation or administration or psychopathy.
"I have to wonder about the price dip on precious metals....it doesn't make sense to me."
Do you think metals exist for speculators or did they become fodder for investment for a reason? The common mistake is believing everything you can invest in, just hangs there waiting for you to make a profit off it. We are at the tail end of more than 15 years of pumping unsubstatiated money into the financial sector to offset the 15 prior prosperity years. 100% of our money needed to go into making the foundation for the next economic cycle, not making unproductive non-engaged people-- wealthy. The FACT is- every printed currency unit is tied to a debt instrument and likely cross-funded by derivatives that wholly rely on future gains for solvency. These are also prioritized above all else in liquidation, so if the future gain doesn't materialize, all other investment compromise because of it. It's a Stupid Loop, designed by banker-financiers to ensure both ends of the candle go down in flames while the wick-less center thinks the dysfunctional hunk of wax remaining, has value or purpose. Metals are the hedge of anarchy theorists who see themselves riding high while the masses die from starvation. What a dumb premise. Stocks support administrative platforms that couldn't revert into functional productive businesses without all the people they terminated, so the platform is really a black hole stuffed with pariah (accountants, financiers, bureaucrats and lice). Bonds are bogus because a bond is a promise of function with a result. You tell me... when Ben Bernanke prints a Trillion and gives it to banks who lose it in markets and cooked book scams, what tangible aspect of promise is fulfilled? Organized finance and investment is a toxic waste dump and you are glowing orange being in it. The story of Midas is a lesson in financial control manipulation and abuse. Do you know it?
China is a very risky investment environment anyway. First there is the complete lack of transparency--the stats the government wants you to hear is what will be published. And if a company is run just to channel profits to the local cronies--which it probably is--this won't get "exposed" unless the principals are now politically out of favor.
But beyond that, the banking system is so full of non-performing loans and paper for see-through buildings and factories that, if you're avoiding Euro banks now you should stay a mile away from Chinese financials. If you're avoiding Euro stocks because of the banking system--well, you get the idea.
Waitress : Your orders up sir, greenbacks piled high between two slices of gold bar, gently sprinkled with silver dust and a big helping of pompus on the side.
Enjoy your greed sandwich.
Barry, Karl was a pretty good boxer from Germany who lost to Ali back in the 60`s.I met
Leon Spinks and Earnie Shavers in Vegas a coule of months ago.Nice guys.
I`ve made money with a couple of China funds, but they`re not long term holds.I got in,
made money and got out.It`s that way with these countries.I don`t trust their accounting.
The best way of participating in the growth of China...by investing...would be to own American Companies like McDonalds, Coca Cola, GM who are already particpating in China's economy and have market share.
Supporting American firms around the world that derive income from various sources and are profitable are what create jobs.
Writting long essays about the way life used to be or your interpetation of what politics should be has never served investors very well, because quite frankly thats not the way markets work..
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