Nov 05, 2009 @ 01:34 pm
"It's the only place we could take a company in a developed industry and double our business each year for five years. Where else can you start out with $5 million in sales and be making $35 million in practically no time?"
That's what one of the world's leading Chinese financiers told me over dinner last night.
It has caused me to rethink the growing bubble in Chinese markets. And that we may have thought a bit too much, looking too closely at key economic fundamentals like electricity consumption and age demographics in the past.
As we've professed throughout this rally at the Prosperity Dispatch, we should be looking at taking what the markets gives us. Here's the new take on China.
Mainstream Media Signals
Just like U.S. stocks, Chinese stocks soared during the rally. Almost anything China related has more than doubled.
The primary catalyst was obviously a surge of cheap - really cheap - money into China's economy. Banks, at supposedly government demand, ramped up their lending to historical proportions.
The cause was obvious and most pundits jumped on board. And just like they have prematurely called an end to the rally in the U.S., there have been even more who have called an end to the new China bubble.
In April, the Business Insider warned "China's bubble will burst. And painfully."
In July MSN stated, "Easy money inflates a New China Bubble" and how it saw an "overheated" China economy.
In August, Paul Krugman, Nobel Laureate economist and New York Times blogger, claimed, "[China] is blowing bubbles."
They were all on top it. But they all forgot how markets work. The stock market doesn't care about the long-run costs or impact of the bubble; they just care about the next move.
And right now and in the intermediate future, the trend is up. Here's why.
It's the Domestic Economy, Stupid
A lot has been made throughout this downturn of China's declining exports. Granted, China's export-fueled growth over the past 30 years has run into some serious roadblocks. But there is two ways to look at this though.
One view - the mainstream view - China's economy is screwed. U.S. consumers are maxed out. And without them, there's no one to buy Chinese goods. Sure, exports will not halt completely, but the boom years are pretty much over.
The other view - the one the market is taking - is that this means opportunity. As the thoughtful David Rosenberg points out, "Remember - consumption in China is only 33% of GDP, the lowest of the world's leading economies." That means there's a lot of room to grow.
The key thing here is what is actually going on in China. From what I gather, there has been a fundamental shift in China's industrial priorities over the past few years. It's something anyone who merely looks at the GDP, retail sales, or electricity consumption data would completely miss.
The shift is away from the very low-margin manufacturing and into more value-added products. Vietnam has demonstrated its willingness to manufacture clothing, simple toys, and all sorts of low-margin, labor intensive products. The change frees up China, its more educated workforce, and better capitalized companies to manufacture more value added products like electronics, cars, etc.
Think of it like the U.S. during the turn of the century. The U.S. economy shifted from relying on production of steel, textiles, coal, and other raw materials and low-value products to making stuff on the higher end of the value spectrum. That's what is happening in China right now. And having a willing and able partner like Vietnam who's rolling out the red carpet (no pun intended) will only accelerate the shift.
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