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Urban China’s Dilemma
February 16, 2010
Analysts at UBS have identified a challenge for a rapidly urbanizing China, and within that challenge, they see an opportunity for investors.
The challenge: more Chinese are moving to cities in search of work and they are making better money than they could in the countryside. But as incomes have risen, so have inflation and household spending. Savings by financially stretched urbanites have declined dramatically, and this means they may have trouble taking care of aging relatives and at the same time providing for their future retirement.
The chart shows how citified China has become over the past three decades – 20 percent urban households in 1980 has increased to 45 percent this year.
The opportunity: UBS has urged China to create a mandatory retirement program funded by payroll deduction as the best way to ensure that workers can eventually retire and not end up destitute in old age. If such a program were created, it could mean tens of billions of dollars worth of pension-fund investments going into the Chinese stock market.
The U.S. faced a similar senior-citizen situation in the early 20th century, when this country was going through a period of rapid industrial growth and urbanization. In the 1930s, the poverty rate among U.S. seniors was about 50 percent. The solution then was the Social Security system, which is still today the primary source of income for millions of American retirees and their dependents.
How the Beijing government chooses to address this issue remains to be seen, but there’s little time to waste — the number of Chinese age 65 and above is expected to double in the next two decades and it will take many years to build a pension system with sufficient scale to provide adequate benefits to a growing number of people with need.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2009. #10-107
China: Social Stability Through Economic Prosperity
February 12, 2010
China sees a bubble ahead and is trying to avoid it – is that such a bad thing?
Isn’t this what we expect Ben Bernanke and the Federal Reserve to do here at home – take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold?
The People’s Bank of China did just that after it saw that 1.4 trillion yuan ($204 billion) worth of bank loans were issued in January, more than the total loaned in the three previous months combined.
For all of 2010, the target loan amount is 7.5 trillion yuan, so it’s easy to see why the government might want to slow the pace a bit.
Forbes’ online headline was “China Tightens the Screws,” but let’s have a little perspective.
Barclays Capital predicts that the 0.5 percent increase in bank reserve rates (from 16.5 percent of deposits to 17 percent) will remove 300 billion yuan from the Chinese economy. That’s only 20 percent or so of the amount loaned in January.
And it’s not like cash is going to dry up – the People’s Bank plans to increase the nation’s M2 money supply by 17 percent this year. January’s M1 money supply report showed a 39 percent increase (chart above). Not exactly a screw-tightening.
China’s CPI rose 1.5 percent in January, which is not extreme, and the chart above from BCA Research shows that real estate prices in terms of per-capita income had not entered a bubble phase as of year-end. But perhaps the more telling number was wholesale prices – up 4.3 percent year over year and more than double the increase seen in December. This signals that higher inflation at the consumer level could be around the corner.
Markets are taking a hit based on this news – this shows how important China has become to the world economy. It surpassed Germany as the top exporting country by value at $1.2 trillion, and in January its exports were up 20 percent compared to a year earlier. Even better, its imports were up 85 percent year over year.
What we may actually have is a classic bull market in the making – one that climbs the proverbial wall of worry, which suggests that investors buy on corrections. The table below shows the standard deviation (sigma) over 10 years for the main stock markets in mainland China and Hong Kong. The weekly sigma for the Shanghai A-share market is plus or minus 5 percent, while its normal quarterly swings can be nearly 25 percent up or down.
It’s nearly impossible to pick exact tops and bottoms – adding to core positions after any correction greater than one sigma is a safer and more prudent way to invest.
Beijing is tending to its economy so it performs over the long term. This is central to its goal of social stability through economic prosperity, and it seems to be working – millions of households join China’s middle class every year.
We all know what can happen when an asset bubble grows huge and then bursts – we’re still recovering from 2007-08.
China is a long-term growth story, and how well it manages that growth will have an impact on all of us. A little caution now should be seen as preventative maintenance, and we all know that when we’re talking about cars or economies, that’s a good thing.
M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related desposits, savings deposits, and non-institutional money-market funds. M1 Money Supply includes funds that are readily accessible for spending. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 A-share stocks traded in the Shanghai and Shenzhen stock exchanges. The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shanghai Stock Exchange available for investment by foreign investors. The index is priced in US dollars. The Shenzhen B-Share Stock Price Index is a capitalization-weighted index that tracks the daily price performance of all shares listed on the Shenzhen Stock Exchange available for investment by foreign investors.
Are Diamonds in the Cards for Coal?
February 05, 2010
While many market forecasters are expecting a slowdown in commodity demand due to a reduction in stimulus around the globe, coal is one commodity that’s expected to stand strong.
The reason coal prices are expected to remain buoyant is unprecedented demand from China.
As the chart shows, China moved from a net exporter to a net importer of coal last year and a big jump in the amount of coal imported is expected. The amount of coal imported into China is forecasted to balloon to more than 15 million tonnes in 2010—up from less than 5 million tonnes in 2008.
A recent report from Deutsche Bank says it expects an increase in Chinese demand due to economic growth and a reduction of coal production in the Shanxi province because of safety and environmental issues.
Environmental concerns are important to keep in mind because of the high amount of carbon involved in coal power plants. China is the world’s largest consumer of coal—which provides nearly 70 percent of China’s power—and demand for power has been skyrocketing. Any global legislation regarding carbon emissions could certainly have a big focus on China.
According to CLSA, China has accounted for 40 percent of global power and heat generation since 2002. Over this time, China’s power demand has more than doubled while the rest of the world had declined around 25 percent as of 2007.
This increase has put China in second place—just behind the United States—in terms of electricity demand. More telling of what the future may hold is the fact that China consumes four times as much electricity per dollar of gross domestic product (GDP) than the U.S. does, according to a story from BusinessWeek citing International Energy Agency (IEA) estimates.
China has bold plans to diversify its power—including big plans for nuclear we wrote about recently—but coal will be the major beneficiary of increased power demand until these additional sources are brought online.
#10-96
America’s Impact on Asian Students
January 20, 2010
Some say America’s influence in the world is waning, but you couldn’t tell that by looking at higher education.
A record 671,616 foreign students attended U.S. universities during the 2008-2009 academic year, according to the Institute of International Education. That’s up 8 percent from the previous year.
The trend shows accelerating growth – the number of students enrolling for the first time in U.S. institutions jumped nearly 16 percent.
And these students are learning the skills needed to build their countries – 20 percent study business and nearly as many are enrolled in engineering programs. Another 10 percent or so are in the physical sciences.
Not surprisingly Asia is the largest source of these students, with India and China together accounting for 30 percent.
Perhaps the most telling statistic – nearly two-thirds of the international students are funding their U.S. education with personal and family money. They recognize that this training is an investment in their future that’s well worth paying for.
Once graduated, most of these ambitious students will take their world-class educations and their up-close look at the “American Dream” back to Shanghai and Sao Paulo, Mumbai and Mombasa, and the many other places striving to raise their quality of life.
In this way, the U.S. provides a valuable service to the world.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. #09-881
A Nobel Prize Winner’s View of China’s Growth
January 13, 2010
The China growth story generates a wide range of opinions and these opinions are of varying value.
Robert Fogel’s forecast in the current issue of Foreign Policy magazine ($123,000,000,000,000) is far beyond anything that we’ve heard in terms of China’s growth. Fogel has stature that makes him worth listening to – he heads the Center for Population Economics at the University of Chicago and shared the 1993 Nobel economics prize.
Among Fogel’s stunning predictions for China by 2040:
- China’s GDP will be $123 trillion, more than double the current GDP of the entire planet
- China will account for 40 percent of the world’s GDP (currently about 8 percent)
- China’s per-capita income will be $85,000 (currently about $3,000)
“China was the world's largest economy for much of the last two millennia,” Fogel writes. “While Europe was fumbling in the Dark Ages and fighting disastrous religious wars, China cultivated the highest standards of living in the world. Today, the notion of a rising China is, in Chinese eyes, merely a return to the status quo.”
Why are Fogel’s projections so far above everyone else’s?
He says others are underestimating the economic multiplier effect of Beijing’s ambitious push on education as a way to increase worker productivity. He believes China will be able to add six percentage points to its GDP growth rate just through education.
He also says the rural population’s role in China’s dramatic growth and the impact of the Chinese consumer (“In many ways, China is the most capitalist country in the world right now,” he writes) are both being underestimated.
We see the China growth story as the most powerful driver of profound and permanent change in the global economy. Fogel’s predictions may or may not prove accurate, but his case for China’s upward trajectory continuing well into the future is well worth reading.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link, you will be directed to a third-party Web site. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change