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Rising China is a Misnomer...and Other Actionable Takeaways

June 20, 2012

Did you know that at the beginning of the 19th century, China made up the largest share of the world’s GDP? This makes the term “Rising China” a misnomer, as the country has been simply returning to, instead of rising to, super power, says former U.S. Secretary of State Henry Kissinger.

This is only a fraction of what U.S. Global’s analyst, Xian Liang, learned at the J.P. Morgan China Conference in Beijing. About 2,000 investment professionals from 30 countries were in attendance hearing from well-known speakers around the world. The show went on without Jamie Dimon, who was testifying before the Senate about the recent $2-4 billion trading loss. It’s interesting that this is the first time in 79 years for a bank executive from J.P. Morgan to testify; the last time was when Jack Morgan testified before the Senate in 1933.

Here are other takeaways we thought you’d find interesting:

  1. Record-Breaking Growth Pace. Global Head of Equities Carlos Hernandez from J.P. Morgan quoted Robin Meredith, stating that it took England 48 years to double its GDP starting in 1780. In the U.S., it took 47 years from 1839. In Japan, it took 34 years from 1865; South Korea only took a remarkable 11 years from 1966. China set a record, doubling its GDP in only 9 years from 1978, and again from 1996.
  2. Significant Trading Partners. U.S. Ambassador to China Gary Locke says in 1972, annual bilateral trade between the U.S. and China was less than $100 million (back then, the largest category of U.S. exports to China was cereal; from China to the U.S. it was animal parts). Now trade is more than $1 billion a day, with 800,000 U.S. jobs dependent on exports of goods and services to China. 
  3. Improved Trade Relations. Former U.S. Secretary of State Henry Kissinger says U.S relations with China have come a long way. As one example, back in the summer of 1969, it took a month of debates between the U.S. administration and Congress to agree to allow American citizens to buy up to $100 worth of Chinese goods through Hong Kong.  
  4. Rising Tourism Potential. Chinese tourists spend on average $6,000 per visit to the U.S. (This compares to an average of $4,000 spent for all tourists, as I indicated in a recent post.) Since he took over, Ambassador Locke has cut the average waiting period for visitor visa interviews from as long as 100 days several years ago to less than six days.
  5. Strong Leadership. China’s biggest positive is that the country has strong leadership, as opposed to a leadership vacuum in Europe whose monetary policy is hijacked by fiscal policy, which is, in turn, hijacked by the social welfare system, says China Investment Corp. (CIC) Chairman Jin Liqun. In other words, the European crisis is not an economic predicament, but a political one fraught with errors in macroeconomic policymaking and implementation.
  6. Evolution vs. Revolution. Former Prime Minister of the United Kingdom Tony Blair said his recent tour to the Middle East left him with the impression that in the short term, regional sentiment for “revolution” may continue, but over the longer term, government policies are needed to facilitate “evolution.”
  7. Numbers of Parties Matter. CIC Vice Chairman Gao Xiqing is quite constructive on the U.S. Despite the “fiscal cliff” fears, it’s still easier to manage two parties (in the U.S.) than 76 parties (in Europe).
  8. Huge E-Commerce Growth. Several speakers, including Expedia’s Chairman Barry Diller, Newmont’s CEO Richard O’Brien, and Pepsi’s Chairman for Greater China Tim Minges, see e-commerce as one of the most exciting opportunities to invest in China.  E-commerce has been taking share from traditional retail and now accounts for 4 percent of retail sales.
  9. Ideal Conditions for E-Commerce. The last mile of infrastructure is now complete (speedy intercity delivery), and China has all the right conditions for e-commerce to thrive: 1) smart, thrifty shoppers who will buy the same product online if cheaper, 2) pervasive distrust, which boosts a firm such as Alipay (subsidiary of Alibaba) that allows customers to pay only after product is delivered and satisfaction confirmed, and 3) low cost, speedy delivery (only a half to one-third of what is considered standard shipping time in the U.S.).  Around 40 percent of Chinese internet users shop online.

The last two points affirm Xian’s belief that there is considerable potential to monetize the Internet in China. He shared the following charts with Investor Alert readers: In 2010, Chinese spent about half of their time on the Internet, significantly more than people in Japan, Korea, the U.S. and the U.K. Meanwhile, online ads spent as a percent of total ads is the lowest in China compared to the other countries.

Big Monetization Potential Chinese Internet

I’m a big believer in combining tacit and explicit knowledge, and as our investment team circles the globe scoping out investment opportunities, I’ll share more of their insights. In the meantime, feel free to forward these posts to your friends.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned was held by one or more of U.S. Global Investors Funds as of 3/31/12: Newmont Mining Corp.

Net Asset Value
as of 10/31/2014

Global Resources Fund PSPFX $8.28 0.07 Gold and Precious Metals Fund USERX $5.12 -0.31 World Precious Minerals Fund UNWPX $4.74 -0.25 China Region Fund USCOX $8.13 0.13 Emerging Europe Fund EUROX $7.36 -0.01 All American Equity Fund GBTFX $33.07 0.39 Holmes Macro Trends Fund MEGAX $23.31 0.31 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change