- August 19, 2010
- The Biggest City You’ve Never Heard Of
Deep inside China, the city of Chongqing is growing so fast that maps are out of date the moment they’re printed. Even for a country busting at the seams with development, Chongqing is exceptional—it’s the world’s fastest growing city.
From just 200,000 people in the 1930s, the city’s population has ballooned to 32 million and there are no signs of slowing – the metropolitan area absorbs an additional 1 million people every year.
Like many other places in China, this high-speed transition has overwhelmed infrastructure and the very idea of “city planning.” An article about Chongqing in the latest issue of Foreign Policy magazine likens the city’s growth to “a railroad car hurtling down the line at the same time that attendants scramble to hitch on the wheels and lay the track.”
Speaking of laying track, $1.5 billion is to be spent on the city’s light-rail system and $1.2 billion on other rail lines this year, Foreign Policy writes. On top of that key infrastructure outlay, $2.3 billion is going to highways and a massive project is under way to double Chongqing’s airport capacity to 30 million passengers by 2011 and 70 million by 2020. Financing for these and other projects is a mix of government and foreign investment.
On the jobs front, the local government slashed corporate tax rates to 15 percent (the national rate is 25 percent) to woo foreign corporations. That appealed to Hewlett-Packard, which is setting up shop in the area.
The “Chongqing model,” as it is called, has quadrupled the city’s GDP since 1998 to $86 billion. Currently, the city’s per capita income is only $3,300 a year, well below Beijing’s $10,000 level.
Chongqing’s robust weapons, motorcycle manufacturing and chemicals factories aren’t cheap-labor exporters to the developed world. Nearly 90 percent of the industrial goods produced in Chongqing are kept in the country.
This is a good example for the Beijing government to point at as it works to transition China from an export-led economy to one built on domestic consumption.
Read more about investing in the China Region.
By clicking the links above, you will be directed to the Foreign Policy website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 6/30/10.
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- October 13, 2010
- China’s Effect on Copper
LME Week is an important tradition in the global metals industry calendar that takes place each year in London during the fall. This year’s event kicked off on Monday and the spotlight on industrial metals couldn’t be brighter, especially for copper. With prices up around 13 percent so far this year, copper’s notched a spectacular rebound off its lows and currently sits about 10 percent below its all-time high set in 2008.
China’s role in the copper market rebound can’t be overstated. World consumption of copper has increased 14.9 percent from 2003-2009. But remove China from the equation and world copper consumption swings in the opposite direction to a 14 percent decline over the same time period. Meanwhile, the other BRIC countries (Brazil, India and Russia) combined have seen their copper consumption grow 15 percent since 2003.
China and emerging nations need the copper because it is the most important metal for a rapidly industrializing nation. The average single-family home uses 439 pounds of copper in construction, an air conditioner uses 52 pounds and a refrigerator uses 4.8 pounds. The average vehicle contains more than 50 pounds of copper stretching nearly a mile, and Chinese auto sales have been booming.
In order to meet its ever-increasing demand for copper supply, China has looked beyond its borders for new sources. This chart from BMO Capital Markets illustrates the rapid rate in which Chinese copper imports have risen since Beijing announced the $586 billion stimulus plan in November 2008.
BMO expects Chinese copper imports to remain robust and on the rise and says “China is commanding a significant influence over the price of copper.”
Last year’s spike in Chinese copper imports left copper in short supply for everyone else, just as demand in the developed world is beginning to turn around. Morgan Stanley (MS) reports that consumption in the U.S. is up 5 percent in 2010 versus the same time period last year, with the European Union up 12 percent and Japan up 37 percent.
MS is estimating that this rise in demand coupled with a weak supply response will have the global copper market poised to shift into a deficit this year and remain there until 2013.
This could mean we haven’t seen the end of rising copper prices. BMO just revised its 2010 price forecast up 6 percent to $3.39 a pound, as well as its forecasts for 2011 and 2012.
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- March 16, 2012
- Full Steam Ahead for China Rails
China’s economic engines of growth have begun to accelerate again, but you wouldn’t know it by looking at the chart below. After approvals for new railroad projects spiked to a five-year high in the third quarter of 2010, the number of new plans slowed, then completely halted throughout 2011, decreasing 89 percent by value, says J.P. Morgan.
There were multiple reasons for the slowdown in railroad construction, says BCA. A bullet train crash caused heightened concern for safety last summer. Also, the government intentionally delayed projects as it pulled the brakes to decelerate growth and curb inflation.
Since China received signs of slowing inflation over the past few months, it can now shift its attention toward growth. Recent policies are sending a “full steam ahead” message to railway investment. According to J.P. Morgan, in December and January, China announced tax benefits on interest income for railway bondholders, issued bonds for railway projects, and injected cash into the two largest train makers. This concerted effort should help the country meet its long-term goal to connect 100 percent of cities with a network of high-speed rail.
Over the past two decades, China’s railway system has come a long way very quickly, with track length increasing 50 percent since 1995. Demand has increased at a faster rate, though, as “passengers travelling on the country’s railway system per year doubled during the same period, while railway freight increased by 150 percent,” says BCA.
And, on a per capita basis, China’s rail length is much lower than most major economies, according to BCA Research. When you compare the total length of railways in developed and emerging markets, Australia has the most rail per capital, with 1.77 kilometers of railway per 1,000 persons; Brazil has considerably less, with only 0.15 kilometers of rail track per 1,000. However, as you can see below, China lands in last place for the total length of railway per capita.
Although China has been busy constructing its railways over the past few years, this comparison shows that this infrastructure buildout has been more of a “catch-up process,” rather than an “overshoot,” says BCA.
New! Webcast on China
Learn more about China and what’s expected throughout 2012 by joining CLSA’s Andy Rothman and me for a webcast on April 5. Register today for Hard or Soft Landing in China? Navigating China’s Transition to a Consumer-Driven Economy.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- March 14, 2012
- Chart of the Week: The World’s Infrastructure Plans
Demand for access to basic needs, an emerging middle class and a never-ending use of global resources—these are the primary drivers of major infrastructure projects over the next several years, says GE.
In its Investor Meeting last week, the firm highlighted a few macro slides on world growth. One slide pins major global infrastructure plans totaling $4 trillion over the next 2 to 20 years.
Emerging markets across Africa, Asia, the Middle East and South America are overwhelmingly the ones pulling out their checkbooks. A number of projects are expected in Brazil, including the PAC 2 investment program totaling $872 billion, Petrobras Oil & Gas project of $225 billion, and the infrastructure spending for the World Cup and Olympics expected to cost $668 billion. Brazil’s PAC 2 will mostly be spent on energy and the remainder on subsidized housing, urbanization, sanitation and electricity distribution, says Financial Times.
India and Russia also have tremendous infrastructure plans, as each country is expected to be a half of a trillion dollars. China’s 12th Five-Year Plan is expected to spend $840 billion on the power industry and another $180 billion on health care.
In GE’s presentation, the president & CEO of Global Growth & Operations, John Rice, says many of these countries’ governments face extraordinary pressure “to increase standards of living and reduce the wealth disparity.” Of the world’s population of 7 billion, GE says 1.5 billion have no access to basic needs, such as health care, electricity and water. In addition, in the next 20 years, another 3 billion people will be added to the middle class, according to GE. That equates to 150 million people each year who will have the means and “the same kind of demands in terms of basic living conditions and infrastructure” available in the U.S., says Rice.
This trend is what I refer to as the American Dream Trade. When the boomers were babies, President Dwight D. Eisenhower signed the 1956 Federal-Aid Highway Act. The “great road program” was said to be the most intense road construction period in U.S. history, altering where Americans chose to live, vacation and work. A 62-day trip in 1919 from Washington D.C. to San Francisco was reduced to two days due to the U.S. interstate system. This helped sustain a more than tenfold increase in the U.S. GDP, according to the U.S. Department of Transportation.
A pursuit of the American Dream from the U.S.’s emerging middle class led to the success of many well-known U.S. companies. Restaurants including McDonald’s and Dairy Queen and automobile manufacturers Ford and GM prospered following this infrastructure spend.
The infrastructure plans taking place across emerging markets emulate a 1950s America. As these governments help their residents pursue the American Dream of better homes, health care and quality of life, I believe the companies with a strong footprint in these growing markets stand to benefit.
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 above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
The following security mentioned was held by one or more of U.S. Global Investors Fund as of 12/31/11: General Electric.
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- March 12, 2012
- Appreciating China to its Fullest
Wine expert and social media guru Gary Vaynerchuk attributes his ability to detect subtleties in wine that others might not recognize because of his unique taste-testing as a teen. Because drinking wine was illegal, he says he tasted the flavors associated with wine instead. He not only ate fruits and vegetables, but also chewed on chunks of grass, dirt, tobacco and wood so he could learn to recognize the complex flavors that wine has to offer.
For investors, an appreciation of China requires a similar comprehensive analysis.
One significant subtlety that seems to be overlooked by investors today is China’s macro policy strategy. Professor Stephen Roach in the Financial Times thinks the country has been "doing a far better job in managing its economy than most give it credit." Its actions have been deliberate and purposeful, and, most important, successful. He points to measures that China enacted to lower food inflation, along with the numerous times the country raised required reserve ratios and policy interest rates as illustrations of China’s increasing “prowess” in stabilizing its economy.
The positive results of the government’s actions have a delayed effect, only to be detected a few months later. For example, the chart below shows how the food and non-food consumer price index (CPI) have declined on a year-over-year basis over the past several months. CPI is now at its lowest level since July 2010, says CLSA.
With inflation now under control, China is stocked with other possible monetary policy actions to help growth in 2012, as opposed to the central banks of the U.S., Europe and England, which have run empty. “They have followed the Bank of Japan and taken their short-term policy rates down to the zero bound,” Roach says.
Perhaps the sommeliers have become the students: Rather than the developed countries’ central banks providing directives to China on ways to grow its economy, maybe it should be the other way around. Roach says that China “offers some lessons in macro policy strategy that the rest of the world should heed.”
Roach concludes that “long focused on stability, [China] is more than willing to accept the short-term costs of a growth sacrifice to keep its development strategy on track.”
Jim Rogers has also identified many attractive nuances of China, which he believes China Bears are missing. When the legendary international investor was interviewed last week by Business Insider, he pointed to the country’s long history of “entrepreneurship [and] capitalism, they have the brains, they have the know-how” as reasons to be bullish.
Its likely China will experience setbacks as it grows, says Rogers. After centuries of decline, the country just recently experienced a rebirth when Deng Xiaoping led China toward a market economy in 1978. Growth is still in its early stages. However, each time China data appears slightly off, bears are quick to doubt Beijing’s ability to successfully navigate its economic terrain.
When Premier Wen Jiabao announced this week that the government’s targeted GDP growth was expected to be 7.5 percent, it wasn’t a surprise to seasoned China followers. Andy Rothman of CLSA says it was consistent with his expectations. Premier Wen’s message came as “neither a surprise nor a signal that the Communist Party believes growth is decelerating beyond what we had expected.” Rothman also doesn’t think Wen’s speech signaled additional stimulus either.
Sometimes a target is just a target: China’s GDP has always grown more than what was projected. Take a look at the chart below. The yellow line shows how China has conservatively set its target GDP growth for the past decade. Every year, actual GDP growth has been higher and much higher in some cases. For example, in 2007, while the government projected GDP to grow 8 percent, actual GDP growth came in much higher at 14 percent.
While most analysts don’t expect another moon shot rise in GDP this year, a 7.5 percent growth rate still exceeds most emerging economies and all developed nations. Advanced economy growth is expected to be meager, slowing from 1.6 percent to 1.3 percent in 2012, according to The Conference Board.
Since the new year, the MSCI China Index has risen about 11 percent. This increase comes after a 2011 decline of nearly 20 percent. However, last year’s sell off continues to provide bargain basement prices for some Chinese stocks, as the index is trading at an attractive price-to-earnings level, says Deutsche Bank. While the 10-year P/E has averaged 12.5 times, the 12-month forward price-to-earnings for the MSCI China index is currently at 9.1 times.
Deutsche Bank strategists say with “very healthy” GDP growth and moderate inflation, the “macro fundamentals should easily justify a further rerating of the forward P/E to 10.5 times” by the end of 2012. This valuation suggests that the MSCI China could increase 15 percent from its March 8 level, says Deutsche Bank.
For long-term investors learning to appreciate the finer points of the country, we believe China is somewhat like fine wine; it only gets better with age.
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 links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The MSCI China Index provides coverage of the large and mid cap segments and is constructed according to the MSCI Global Investable Market Indices Methodology. The MSCI China Index is part of the MSCI Emerging Markets Index.
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