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Markets in Hong Kong, Vietnam, Taiwan and Korea are closed this week as people across Asia celebrate Moon Festival, one of the culture's most beloved holidays along with Chinese New Year. Moon Festival's origins center around a husband (Houyi) and wife (Chang'e), who were sentenced to live eternally separated on the sun and the moon.
Chang'e, representing "Yin," lives on the moon and Houyi, representing "Yang," lives on the sun. Once a year, on the night of the Mid-Autumn Festival, Houyi visits his wife and that is the reason why the full moon burns brightly on this night. To read the complete version of Chang'e and Houyi's tragic tale, click here for a version Sherman Guo from CICC shared with us earlier today.
For many, the yin and the yang illustrate the importance of having balance in life. Investors must find the right risk/reward balance. Businesses must find the right capital spending/revenues balance. And, we all must strive to find the right work/life balance.
China's Economy Finds Balance
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Balance is also a crucial goal for China's economy-the economy must not grow too quickly or risk a sharp correction. Just this year, China has weathered an epic battle with inflation, drought and floods, poor global macroeconomic conditions, massive accounting/corruption scandals and a tragic accident on one of its marquee achievements-the country's high speed rail system.
We've discussed the tremendous build-out of China's high speed rail system before (Read: Railway Revolution Builds China's Consumer Culture). Last week, members of our investment team and board of directors were in China doing research and you can see from the photo that we were lucky enough to see what traveling at the speed of China feels like firsthand. Our train averaged 185 miles per hour during the 923-mile trip from Shanghai to Beijing. I've traveled to all corners of the world and have seen many things during my travels, but viewing China's explosive growth as it flies by you is something I will never forget.
China remains the beacon of hope for the global economy, the largest and, many times, the "sole engine of the world economy," BCA Research says. China's real GDP is forecasted to grow 8.9 percent in 2011 and 7.8 percent in 2012, according to ISI Group. This is a slower rate of growth compared to recent years but "doesn't look like an economy struggling under tighter credit conditions," GaveKal research says.
The key to China's economic growth isn't "how fast?" or "how much?" The most critical question is "what's driving it?"
Many of China's critics, such as Jim Chanos and Hugh Hendry, claim China's current economic status is a mirage created by government stimulus and relies on exports. However, examination of China's economic growth over time (see chart) reveals that consumption and gross capital formation are the two pillars lifting China to the top.
Ending the country's dependence on exports is the "professed pursuit of quality over quantity," says GaveKal and became an immediate necessity for China to maintain economic stability after exports collapsed by 40 percent from September 2008 to January 2009, triggering a sharp slowdown in growth, BCA says. Recent data shows China has kicked the habit as exports have contributed little to the country's growth in 2011. Net exports accounted for 18 percent of China's total 14.2 percent GDP growth in 2007, according to CLSA's Andy Rothman. During the first half of 2011, exports have a negative contribution of -0.7 percent of China's 9.6 percent GDP growth and accounted for only 12 percent of total industrial sales revenues. We'll debunk more tall tales of China's export economy in a moment.
Strong income growth has triggered a rise in domestic consumption. CLSA says inflation-adjusted wages in urban areas rose 7.8 percent in 2010 and have risen another 7.6 percent during the first half of 2011. As a result, urban retail sales and household expenditures increased 17.4 percent and 12 percent during the second quarter of 2011, respectively. In addition, rising migrant wages and higher farm-gate prices have led to a 13.7 percent increase in real rural incomes and 16.8 percent increase in rural retail sales during the first half of 2011, CLSA says.
