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MAKING CENTS OUT OF THE NEWS
Blog #17
(May 6th, 2010)
UPDATE ON CHINA
By Tom McAllister, CFP®
As I write this on Sunday evening, May 2, 2010, at 6:30 PM, the Diamond Princess is sailing out of Qingdao, China, on its way to Alaska. I spent four days on this, my fourth visit to northern China. I was first here in the fall of 1994, as part of my first lecture cruise for Princess, a ten-day affair, returning in 2003 to catch a cruise to Bangkok. My third China visit, seven months ago, marked the end of a Diamond Princess voyage from Alaska to Beijing.
China is a fascinating culture, vastly different from our own. A Communist-led Socialist country, China was, from 1946 until 1979, a rigid dictatorship. New leaders in 1979 realized their system was not working and moved towards immediate change. The country is now governed in a benevolent, yet authoritarian manner which takes advantage of traditional Chinese business expertise and energy, while still maintaining direct control from the top. This government control is enabled through partnerships with the Chinese Army, the Communist Party (five percent of the 1.3 billion people here), and large businesses (in which the government has a sizable, sometimes controlling, interest). Strangely enough, the system appears to work!
The Chinese economy is said to be continuing their decades-long annualized growth rate of
8-10%, an unbelievable feat given the recession last year in the economies of nearly all of China’s trading partners. One would think the Chinese economy is overdue for a slowdown – and one would be right to expect this. I further believe that the Chinese are “cooking the books” now and that they have been doing so for the last couple of years, reporting an unrealistic and certainly unsustainable rate of growth. Chinese banks continue to make loans to companies which, in the USA, would be bankrupt, while the government continues to spend at a heated pace on infrastructure and on services such as electricity generation, all based on a huge layer of debt.
As you can tell, I am a skeptic when it comes to the magical, marvelous Chinese “number system”, and thus would advise shunning investments in Chinese stocks, no matter how attractive they might seem. I suspect a monumental “House Of Cards” which must inevitably tumble down.
Having said this, I feel compelled to admit that, had I maintained such an aversion to investing in China beginning at the time of my first visit in 1994, I would have been completely WRONG and missed the quintupling of the Chinese economy since!
Huge multinational companies have begun to come to China to address the potential demand from 1.33 BILLION people for goods from Pepsi-Cola to GM cars. Speaking of cars, China produced and sold more automobiles in 2009 than the United States! It is only fair to point out that Chinese cars sell for 20-33% the price of an average American automobile.
While multinational corporations can and must take advantage of China's exploding market in which they can sell their products, I continue to recommend caution when it comes to individual investing in China. Remember, China’s authoritarian government can - and does (witness Googles’ battles with them in recent months) - change the rules of the game arbitrarily, often in conflict with their own rather weak laws. If China, despite these dangers, holds a strong lure for you, I recommend using one of the several Exchange Traded Funds which invest exclusively in substantial (and usually highly volatile) Chinese stocks.
As the ship pulls further and further away from the shores of China, I reflect that, barring unexpected circumstances, this visit to China will probably turn out to have been my last. Almost certainly, though, this will not be the last we investors hear from this country of economic contradiction and intrigue!
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