08 December 2008

Recent Readings on China

Below are excerpts and explanations of some recent readings on China:

James Fallows recently interviewed Gao Xiqing, president of the China Investment Corporation, in the pages of The Atlantic. You should read the entire piece, of course, but here's a representative excerpt:

About the financial crisis of 2008, which eliminated hundreds of billions of dollars' worth of savings that the Chinese government had extracted from its people, through deliberately suppressed consumption levels:

We are not quite at the bottom yet. Because we don't really know what's going to happen next. Everyone is saying, "Oh, look, the dollar is getting stronger!" [As it was when we spoke.] I say, that's really temporary. It's simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I'd like to bet on that!

The overall financial situation in the U.S. is changing, and that's what we don't know about. It's going to be changed fundamentally in many ways.

Think about the way we've been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it's 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.

People, especially Americans, started believing that they can live on other people's money. And more and more so. First other people's money in your own country. And then the savings rate comes down, and you start living on other people's money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we'd love to support you guys—if it's sustainable. But if it's not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let's change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the "real economy," etc.]

Craig Stephen at Marketwatch offered up this report on troubles for the Danny Noonans of China:

Put deflating asset bubbles, steep interest-rate cuts and a 4-trillion-plus yuan stimulus package into the mix, and you can expect a lumpy economy at best.

In recent weeks, China has gone from optimism it could escape the global slowdown to a realization its export sector would take a direct hit -- November exports are expected to have shrunk in value for the first time in seven years -- and finally, to worries the whole economy is on the floor.

J.P. Morgan, in a new strategy note, pinpoints the "collapse of the domestic housing market" for spreading the feel-bad factor around.

Leaving aside the export sector, it seems intuitive that many of the industries that fed off the asset and property bubble on the way up will be spat out on the way down. One surprising new casualty of the economy is the jobless golf caddie.
Mission Hills, the self-proclaimed biggest golf club on Earth and recent host of the World Cup of Golf event, is sacking 2,000 employees, or 20% of its staff, according to a recent Bloomberg news report.

The ETF Expert skeptically cites a couple of fund managers buying Chinese stocks:

China's government recently cut its key lending rate by the most it had in more than a decade. It's also pledged a $580 billion stimulus package. Together, these efforts are supposed to stimulate the Chinese economy.

At least that's what a number of prominent international money managers think. Mullen, chief executive officer at Shanghai-based Emperor Investment Management, believes that prices haven't been this attractive since the Asian financial crisis of 1998. Mullen also maintain that Chinese businesses that serve the Chinese consumer and the mainland's infrastructure will post better earnings growth than anywhere else in the world.

Mark Mobius, executive chairman of Templeton Asset Management, agrees. He recently explained that he is aggressively purchasing consumer discretionary stocks due to a likely consumer "boom" in emerging standouts like China.
So call me skeptical if the talk about boundless opportunity isn't a bit self-serving. The reality is, the world is in this thing together. If developed countries worldwide are able to show signs of pulling out of a multi-year recession, the emerging countries will likely appreciate at a faster rate.
If it breaks out above the 50-day, one might wade into to Chinese waters. Yet one will need to be disciplined with a stop-loss percentage in place... to guard against the possibility of rapid deterioration.

Bill at VIX and More is more confident China is about to break out. Last Thursday, he wrote:

If FXI can close above its 50 day moving average again today, it will mark the first time in over six months that FXI has closed above that important technical level on consecutive days. Ten minutes into today's session, FXI is trading at 26.70, down 0.55. With the 50 day SMA at 26.94, any close at 27.00 or above should leave a fairly bullish signal on the chart and support the case for increasing upside momentum.

Today, FXI closed at $30.30.

Finally, here and here are a couple of Seeking Alpha contributors talking their books, one from the long side, and one from the short.

The long guy, Kelvin Schulle, approves of China's recently announced stimulus package before diving into recommending his portfolio of Chinese stocks.

The short guy, Rakesh Saxena, offers up a little more meat to his short-China call:

Firstly, following the announcement of the $585 billion stimulus package, farm-based factory workers see the opportunity to make quick profits from sales of agricultural land to hundreds of infrastructure-related projects. Secondly, in order to boost domestic demand (as opposed to exports to America and Europe), Beijing has taken the unprecedented step of departing from the fundamental notion of collectivisation to dramatically improve the negotiation capabilities of land-use rights. Taken together, the stimulus funds and the land reforms promise deep-rooted structural changes inside the Chinese economy.
[W]hat is clear is that Chinese corporations are being hit extremely hard on two fronts: shrinking domestic consumer demand and sharp reductions in export orders (which cooled by a whopping 15% in November). So until more reliable data on this stimulus-cum-land reforms experiment unravels, Chinese asset valuations must continue to deteriorate.

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