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No, I’m not talking about U.S. stocks! Despite yesterday’s half point rate cut from the Fed, my stance on the U.S. economy and stock market has not changed. And I hope you’ve listened to my suggestion to shed most of your U.S. stocks, with the exception of select gold miners and natural resource plays.
But what about China? China’s stock market has fallen as much as 32% since its recent peak, begging the questions …
Is China’s rip-roaring bull market over?
Has its economy peaked?
Is China going into a bear market?
My answers: No. No. And no!
In fact, by the time you finish reading this, you will see what I see: One heck of a buying opportunity!
One reason …
China’s Economy Continues
To Fire on All Eight Cylinders
The country’s fourth-quarter 2007 gross domestic product rose an amazingly robust 11.2%. That’s down a tad from third-quarter growth of 11.5%, but who’s kidding who? China is still at the top of the heap as the fastest-growing major economy on the planet!
That growth is almost sure to continue because of urban migration and the development of western China. Beijing recently enacted a new series of plans that include $700 billion in spending.
Look, China has the world’s best economic growth record — posting 9.7% annual expansion over the past 26 years. At that rate, China’s now $3.4-trillion economy will double to $6.8 trillion in 7.5 years … and quadruple to $13.6 trillion in 15 years.
In other words, China could become the world’s largest economy by 2022, if not sooner!
What’s more, with fluctuations of less than one full percentage point over the last five years, China’s high economic growth rate has been more stable than that of any other emerging economy in the world, and unrivalled historically.
Meanwhile, Beijing’s fiscal revenues are soaring. According to the National Statistics Bureau, the government’s fiscal revenue hit $691 billion (almost $2 billion per day) last year, up from $261 billion in 2002.
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| Beijing has tons of cash it can use to keep economic growth humming along! |
That kind of money gives Beijing the ability to increase public spending at will. Moreover, they can spend wherever they want.
And don’t forget, that’s just tax revenues. China’s mountain of foreign reserves has climbed to an astounding $1.53 trillion — and is growing at a rate of more than $1 billion per day.
Add it all up, and China has almost $2.3 trillion stashed in the bank. Plus more than $3 billion a day of positive cash flow. In contrast, the U.S. has negative cash flow of more than $2.7 billion per day.
No wonder 51 million jobs have been created in China in the last five years. And as a result, China is experiencing rapid income growth for both urban and rural residents.
The rise from extreme poverty is nothing short of spectacular. Twenty-five years ago, more than 600 million Chinese — two-thirds of the population — were living on $1 a day or less. Today, the number of Chinese living in extreme poverty is less than 180 million.
One consequence: China’s retail sales are exploding through the roof.
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As you can see from my chart, retail sales growth in China has jumped from 9.1% year-over-year growth in 2003 to 16.8% growth in 2007.
And all signs point to continued retail spending growth as Beijing embarks upon a five-year plan to increase domestic consumption even more!
This brings me to another reason to love Chinese investments …
China Is Not As Dependent
Upon the U.S. As Most
Economists and Analysts Claim
Contrary to what most people think, the U.S. accounts for only about 16% of China’s exports. That’s down from 25% in 2001. Singapore, Hong Kong and Malaysia are far more exposed to a U.S. slowdown than China, with their exports to the U.S. running at more than 20% of their respective GDPs.
Why is this important? Because it’s the number one reason everyone’s using to support their forecasts of a major slowdown in China. But they have their facts wrong. China is far less dependent upon the U.S. consumer than it was just a few years ago.
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Moreover, China’s explosive growth over the last five years occurred even as export growth shrunk.
Take a look at the chart: Export growth in China has contracted from 34.6% annual growth in 2003 to 25.7% last year. In other words, even as China’s export growth slows its economy booms ahead.
Moreover, and ironically …
China’s Banking System Is Now
One of the Strongest in the World
I find it incredible that just a few years ago almost every analyst I talked to told me China’s banking system was going to implode with tens of billions of dollars — if not hundreds of billions — in loans gone bad.
I disagreed with them, for a variety of reasons, not least of which is the fact that bad debt in a communist country is not really bad debt. It can be written off at any time because the borrower and the lender are both owned by the same company, the government.
Now here we are today and whose banking system is in trouble? Not China’s. Not Hong Kong’s. Not Japan’s. Not Singapore’s. Not even Malaysia’s or Indonesia’s.
Instead, it’s the U.S banking and financial system that is cratering under HUNDREDS of BILLIONS of dollars in losses in the real estate and mortgage markets!
Meanwhile, China’s banking system is now one of the strongest in the world, with 15% of their deposits held as reserves at the People’s Bank of China, the country’s central bank.
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| China’s banks are now among the world’s strongest, and the country should keep racing ahead. |
Contrast that with U.S. banks, which hold on average about 8% of their capital, including stock and earnings, as reserve capital to meet so-called Tier 1 requirements for bank safety. That’s less than half of what China’s banks hold.
Moreover, several U.S. banks have actually seen their Tier 1 capital erode to dangerously low levels, putting them on the edge of bankruptcy and requiring bailouts.
Witness Citigroup, and its near bankruptcy, only avoided by a $7.5 billion bailout in November from the Abu Dhabi Investment Authority, and another $14.5 billion from Singapore and China just a few weeks ago …
Or Merrill Lynch’s recent $12.2 billion bailout from various foreign sources …
Or Morgan Stanley’s $5 billion infusion from the China Investment Corp.
So, Patriotism and Emotions Aside, in Which
Economy Would You Rather Invest?
The U.S. …
- Which is probably in a recession already
- Which is mired down in up to $500 billion in losses from the real estate mess (with many more dominoes likely to fall over, such as consumer spending, capital investment, and more)
- And whose stock market is down 14% from its highs?
Or China …
- Which is growing at 11%+
- Whose government has over $1.5 trillion in reserves and $3 billion a day in positive cash flow
- Whose banks hold 15% of their capital in reserves
- And whose stock market is down as much as 32%?
If your answer is China, I agree!
My suggestion: Buy the heck out of China’s stock market. The pullback you’ve seen there is nothing more than a sharp technically-based sell-off.
Two investments you can use …
1. iShares FTSE/Xinhua China 25 Index (FXI). One of the most liquid ETFs that tracks China’s top 25 companies, the FXI is a great way to play China. The ETF is down more than 32% from its highs and is now bouncing off of long-term chart support. I consider it a great buy!
2. U.S. Global Investors China Regional Opportunity Fund (USCOX). This mutual fund invests at least 80% of its money in the China region, from Mainland China to Hong Kong, Taiwan and more. Manager Frank Holmes’ worldview and analyses are similar to mine. The fund is now trading at just $11, back to 2003 levels. Another great buy, in my opinion.
And for more specific individual recommendations — and timing signals — subscribe to my Real Wealth Report. At just $99 for an annual subscription, it’s a real bargain.
Also, I suggest you hold all your natural resource positions. As you can see from gold’s recent action — climbing to another new record high — inflation is going to hit full force, even while the U.S. economy contracts.
Best,
Larry
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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