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Five Reasons China Is Not a Bubble
November 16, 2009
This analysis is from Romeo Dator, co-manager of the China Region Fund (USCOX).
A year ago, nobody thought China could manage 8 percent GDP growth in 2009. With year-to-date growth coming in at 7.7 percent through the first three quarters and getting stronger, China is poised to break that 8 percent mark rather easily.
The success of the stimulus and the lofty economic numbers China has managed to produce amidst a global crisis has led many to claim China is the next great bubble.
We see five reasons China is not a bubble and believe that its prospects remain strong for at least the next 20 years.
1) Consumption Continues to be Strong
China is transitioning to a consumption-based workforce. Retail sales rose 16.2 percent in nominal terms during October and have been accelerating. The retail sales figure isn’t a perfect proxy, but it is the best available indicator of overall consumption because it does include sales to consumers and not just purchases made by the government.
We also saw strong growth in industrial production (IP) and power generation both were up more than 16 percent on a year-over-year basis in October. Housing starts were up more than 50 percent (yoy) for the second straight month.
2) Structural Changes to Domestic Economy
We’re seeing a transition to a service-related economy. The service industry is the fastest-growing sector (roughly 20 percent faster than construction) and now accounts for one-third of China’s workforce.
In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. This is why the government has spent such a large amount of the stimulus on areas that benefit the domestic market—that’s where it thinks the economy is headed.
3) Stimulus Exit Strategy in Place
China’s stimulus exit strategy is simple--create a strong economic base that the private sector can launch from. After private investment surpassed that of state-owned enterprises in September, the two flip-flopped during October.
Given the environment, month-to-month fluctuations like this are to be expected since private investment is dependent on how willing Chinese citizens are to put their own money at risk. Even though Beijing is determined to wean China’s economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse.
4) Government Controls on Flow of Money
After lending more money over the first five months of 2009 than all of 2008, we’ve seen loan numbers come down. There’s a longstanding pattern of new loans slowing down during the second part of the year as banks have historically rushed to meet government-mandated loan quotas.
The magnitude of this year’s slowdown—trillions of yuan—is evident of Beijing’s dedication to prevent a bubble from forming. Once the figures grew too large, the government moved quickly to hit the brakes.
While U.S. regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to Chinese citizens—basically stocks, bank savings and property—makes it easier for the government to institute controls.
This is what happened in 2007 when the government forced a slowdown in the housing market before it overheated. After its economy grew 12.6 percent in the second quarter of 2007, China took more aggressive actions to cool its economic growth. The government raised lending rates and also raised reserve requirements to shrink the pool of money available for lending.
5) China’s Long-Term Goals Match Up With Short-Term Goals
In the U.S., the Federal Reserve and policymakers are faced with conflicting goals. They need people to spend in order to get the economy rolling again, but their end game is to have the American people spend less and save more.
It’s the opposite for China.
The problem in China is excess savings and not enough spending. The short-term and long-term challenges are the same—to get people to spend more.
Recent signals that China will begin letting the yuan appreciate against the U.S. dollar are not new. For several years, Beijing has stated a gradual appreciation of the yuan will benefit the economy, and CLSA expects Beijing to resume a 5 to 7 percent annualized appreciation process about midway through 2010.
Rapid economic growth may be common in emerging economies, but there’s only one China. Already the world’s third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren’t making a break from the back of the pack—they’re leading it.
Domestic consumption, the rise of the service sector and increased private investment won’t make China immune to economic bubbles, but these strengths will provide some protection from external forces.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. #09-803
Obama’s China Challenge
November 13, 2009
With President Obama scheduled to make his first presidential trip to Beijing this weekend, China Region Fund (USCOX) co-manager Romeo Dator appeared on CNBC’s “Power Lunch” today to discuss the U.S.-China relationship.
The other guest in the segment was former U.S. Secretary of Commerce Carlos Gutierrez, who stressed that the U.S. relationship isn’t the only one that’s important to China.
[Obama] won’t be able to give them a public lecture. He’s going to find a more assertive, a more confident China. The only thing playing in our favor this time is that the whole of Asia is up in arms about the dollar.
Since the Chinese peg their currency to the dollar, it’s giving them a benefit versus the rest of Asia. The only real chance we have here is for Asia to convince China (to let the yuan appreciate).
Romeo predicted that Asia on the whole will grow in importance for investors.
I think going forward the Asian countries are going to show stronger growth than we’ll have here in the United States and as a result, that’s where money is going to flow. So I think [investors] need to make some sort of allocation toward these markets.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Holdings in the China Region Fund as a percentage of net assets as of 9/30/09: Baidu 2.12%, Ctrip.com International 1.68%. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. #09-806
Planning for a Prosperous Future
November 06, 2009
Another week, another major resource deal announced by China. This week it was Petrobras, Brazil’s national oil company, which announced a $10 billion loan from China in exchange for up to 200,000 barrels of oil per day for the next 10 years.
Another week, another major resource deal announced by China. This week it was Petrobras, Brazil’s national oil company, which announced a $10 billion loan from China in exchange for up to 200,000 barrels of oil per day for the next 10 years.This is the latest in a year that has seen China make $20 billion worth of overseas deals to acquire natural resources (left chart) and issue an additional $50 billion in loans backed by oil.
China’s overseas activity has picked up considerably over the past two years. All told China it has made about three dozen mining deals and another 32 energy deals since 2000.
All this activity has made some nervous, but when you put the deals into context it’s easy to see that Beijing isn’t taking over the world of resources. This year’s oil deals have given China access to an additional 1.2 million barrels per day (right chart).
That may seem like a lot, but China’s oil use is expected to increase from about 8 million barrels now to as much as 33 million barrels a day by 2025.
To keep its economy cooking, China has to find those additional barrels overseas – even now, its domestic production satisfies only 45 percent of its demand.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 9/30/09. #09-779
China’s Private Investment Picking Up
October 28, 2009
Our friend Andy Rothman from research firm CLSA sent out an interesting chart last week following the release of China’s macroeconomic data for the month of September.
As you can see from the chart, private investment (Non State-Owned Enterprises) growth accelerated to 37 percent on a year-over-year basis, a more rapid rate than that of state-owned enterprises. This is the first time we’ve seen this happen since October of last year and it is the fastest rate of growth since November 2007.
A more confident private sector should not only make China’s ongoing recovery more sustainable in a time of diminishing government-mandated stimulus, but also facilitate the structural transition of the Chinese economy toward private consumption.
The private investment revival is largely driven by the real estate sector, which has seen inventory levels drop in major cities like Beijing and Shanghai. CLSA’s on the ground survey revealed that 50 percent of middle-class families surveyed said they were considering buying an apartment.
Activity has also picked up in the business sector. Out of more than 100 small- to medium-sized enterprises surveyed, 32 percent added staff during this past quarter and more than that expected to do so this quarter. Even more telling is that more than two-thirds of the small- to medium-sized enterprises expect the business environment to improve over the next six months.
It’s still too early to call but this could mark a shift in China in which the government’s economic assistance is reduced and economic growth is sustained by the private sector.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-756
Resources: A Demand Story
October 14, 2009
This analysis from Dr. Marc Faber is adapted from our exclusive webcast Global Investing Outlook. Dr. Faber, based in Hong Kong, is a prominent international investor and a member of the influential Barron’s Roundtable. These are some of the thoughts he shared:
If you look at the next 10 to 20 years in the West, I don’t see how the lifestyle of the average person will improve meaningfully. On the other hand, if you look at a country like Vietnam, they have a GDP per capita annually of $800 which may go to $3,000 over the next 15-20 years.
The same is true for China and India. You suddenly have a middle class of 230 million people in India who will be buying cars like the $2,500 Nano (pictured) and other goods.
Once a family moves from the bicycle to the motorcycle, it’s an improvement in their standard of living. But when you move to the car and drive your children to school in your car, it’s a huge increase in your standard of living and your social class.
The Chinese have very little crude oil, natural gas, iron ore and copper of their own. This should support commodity prices because they’re not going to stop buying these commodities.
Chinese steel production went from 10 percent of the world in 1990 to over 40 percent today. Aluminum production went from 10 percent of the world in 2000 to over 30 percent. This isn’t because of exports – it is domestic consumption which isn’t going away.
The bull market in commodities that began in 2001 and lasted until the collapse in 2008 was too short to really trigger a supply response. This is because once the market collapsed, a lot of projects were cancelled and a lot of exploration companies didn’t get the money needed to carry on with exploration.
In our lifetime, we will never again have a synchronized global boom like what we’ve just experienced. Instead, you can expect some countries will do well and others will do less well.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-668
Net Asset Value
as of 11/20/2009
- Global Resources Fund
PSPFX $8.53 -0.06 - Gold and Precious Metals Fund
USERX $16.05 -0.08 - World Precious Minerals Fund
UNWPX $17.97 -0.02 - China Region Fund
USCOX $8.24 No Change - Eastern European Fund
EUROX $8.97 -0.10 - Global Emerging Markets Fund
GEMFX $7.94 -0.02 - Global MegaTrends Fund
MEGAX $7.94 -0.04 - All American Equity Fund
GBTFX $19.21 -0.10 - Holmes Growth Fund
ACBGX $15.12 -0.06 - Tax Free Fund
USUTX $12.24 +0.01 - Near-Term Tax Free Fund
NEARX $2.22 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change