Does investing in China make sense?
Deflation!
Yes, dear reader鈥rices are falling. In April, the US producer price index fell 0.1%.
Oil fell to $72 yesterday. The Dow fell 114 points.
Copper is down more than 20% from its high. Chinese stocks are down 21% so far this year.
The CRB 鈥� a measure of commodities prices 鈥� is down about 12%.
Even gold got whacked yesterday 鈥� down $13.
What鈥檚 going on?
Well, we鈥檙e in that long period of adjustment known (to us!) as the Great Correction.
In the first stage鈥�
鈥he markets discover that its assets aren鈥檛 worth as much as investors had thought鈥�.
鈥reditors find that their credits aren鈥檛 as good as they had believed鈥�
鈥onsumers realize that they don鈥檛 have as much money to spend as they had hoped鈥�
鈥usinesses find that they don鈥檛 have as many sales as they had projected鈥�
鈥nd governments wake up to the fact that tax revenues are coming in at less than expected levels.
Boo hoo.
This leads to all sorts of gnashing of teeth and congressional hearings. But it鈥檚 just the way the world works.
Unfortunately, the way the world works includes a lot of preposterous ideas about the way the world SHOULD work鈥nd a lot of scurrilous efforts pretending to make them work better.
So, while the private sector generally de-leverages 鈥� with lower prices and lower debt levels 鈥� the public sector tends to leverage up. And to hear some economists tell it, if the feds don鈥檛 come to the rescue with bailouts and boondoggles, the whole world economy will sink into a Dark Age.
A few even say the feds have no choice. Richard Koo maintains that if governments stop their stimulus spending 鈥� which, of course, adds trillions to the world鈥檚 public deficits 鈥� the deficits will go up!
Come again?
Yep. Koo鈥檚 point is pure Keynesianism鈥robably correct鈥nd completely absurd at the same time: try to cut your deficit by reducing stimulus spending, he says, and you鈥檙e likely to destroy the economy, and increase the deficit too. More on that later in the week鈥�
We鈥檙e not going to bore you with economics today 鈥� not while the world鈥檚 biggest and most dynamic country lies right outside our hotel.
We鈥檙e staying at the Grand Hyatt. But we could be in any one of dozens of international hotels in Beijing. The city is full of bright, modern, new buildings鈥right, modern, new hotels鈥nd bright, modern, new people.
鈥淭here鈥檚 a HUGE generation gap in China today,鈥� said a dinner companion last night. 鈥淧eople our age [he was about the age of your editor] remember the Cultural Revolution. The only way to survive was to keep your head down. You learned not to stand out in any way. Everyone wore the same clothes. Everyone said the same things. If you didn鈥檛 you might get sent to a labor camp鈥r worse.
鈥淏ut the younger generation has grown up in a China that is completely different. All they鈥檝e seen is progress鈥pectacular progress鈥ncredible growth. And they know that the way to succeed in this new China is to take chances鈥︹��
China has become a nation of entrepreneurs鈥isk takers. It resembles the US in the 鈥�20s 鈥� before the country was taken over by corporate managers and political mandarins. China is a good place to make money.
鈥楻ags to riches鈥� stories are so common you wonder if there鈥檚 anyone left to wear rags. One of those stories had an unhappy ending yesterday when one of China鈥檚 richest men was sentenced to 14 years in jail for corruption.
Today, China seems like a more capitalist country than the US. It is full of gamblers and innovators. The pace of change is breathtaking, with construction cranes all over the city. And the buildings themselves are often daring鈥he roads are straight in Beijing, but the buildings lean. Some walls lean in. Some lean out. Some lean one way and then the next.
The city, what we have seen of it, does not seem anything like a 鈥榯hird world鈥� hive. Instead, it is a giant, modern metropolis. We came prepared to compare it to Managua or Mumbai. Instead, it compares favorably to Chicago or New York.
Beijing is not our kind of city. We prefer places where we can walk around 鈥� like Paris, Zurich or London. This is more of a car-friendly town, like Amarillo or Brasilia. The streets are wide. The buildings are tall and isolated. You go from one complex of modern high-rises to another.
But this city is much more lively than Paris or New York. It is a city still taking shape鈥 city that is still figuring out its role in the world. It is 鈥渕aking its way across a river by feeling the rocks,鈥� as the Chinese say.
Beijing is a still city for tomorrow鈥�
But what about ? Is it a buy or a sell? We asked local experts.
The answer: it depends.
China probably is a bubble economy, in many ways. Property prices soared as people speculated on real estate. Individuals bought apartments and houses as a way to store the money they鈥檇 made in business. But unlike the US, they paid cash. Now, prices seem to be going down. Some areas are going 鈥榥o bid,鈥� with prices collapsing.
But since there is little mortgage debt, it does not seem likely that the residential sector will suffer the same dramatic decline as, say, Las Vegas鈥�
The news this morning is that Las Vegas is in the middle of a housing resurgence. More than 1,000 new units are under construction.
But wait. The city has some 15,000 empty units still on the market.
鈥淢y parents bought a house in Las Vegas in 2000,鈥� said one of our new friends last night. 鈥淭hey paid $220,000. Then, in the boom, it went up to about $350,000. Now the price of the house is about $190,000.
鈥淭here鈥檚 a house I saw the last time I visited. It was on the market in 2006 for $2.9 million. A big house up against the foothills. With a guesthouse and two pools. A really nice place. It was being offered at only $700,000.鈥�
While the residential market is not highly leveraged in China, the commercial market floats on a sea of debt.
鈥淲hat happens is that local governments get into deals with local developers,鈥� our host explained. 鈥淏etween the two of them, they borrow huge amounts of money from the banks. Then they build something that feels good to everyone associated with it, but that might not have much commercial potential. Nobody wants to see the project fail, so it tends to be refinanced鈥nd refinanced鈥ntil it is carrying a mountain of debt.
鈥淲hat we鈥檙e going to see, I think, is that all that debt will come crashing down. It鈥檚 going to be a mess for while. Maybe a long while.鈥�
Does that mean an investor should stay away from Chinese shares?
鈥淣ot necessarily,鈥� says our local expert. 鈥淢any of these companies are still growing very fast鈥nd many are not dependent on the building boom. Some of them have nice little niches鈥ike selling beer and soap to a huge population of people whose incomes are rising. And because their prices have been knocked down, you can buy these companies for about 8 times earnings. It could be that they鈥檒l go down some more in the coming crisis. Still, they could turn out to be great investments over the long run.鈥�
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