By now you’ve probably read the NY Times article by David Leonhardt titled Can the Chinese Become Big Spenders? It is a very lengthy piece that among other things seems to chronicle what seems like a peculiarly rapid evolution of the Chinese economy.
Here’s a good quote to start with;
To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever.
China makes a lot of stuff the world (including the US in a big way) needs or wants. Cheap labor has been one facet of the China story and prosperity is leading to higher wages which contributes to the improved living conditions. At some point the cheap labor may not be that cheap anymore and this sort of manufacturing will move to other countries like Vietnam.
The article cites various stats about the lack of innovation, mostly technologically oriented, in China compared to the US (think piracy of intellectual property) although there was no mention of Huawei (at least I don’t think so, it was a long article). It is not clear to me that innovation is quite the linchpin the article makes out, at least not yet as it seems like China can really sell efficiency for many years to come. Of course at some point there is no more efficiency to be had and so something, maybe innovation, must come next.
China now spends about 50 percent of its gross domestic product on a broad category economists call investment — roads, bridges, trains, ports, technology, factories and office buildings.
The investment in infrastructure is a huge theme in many markets around the world. This is part of the process of an ascending middle class in many countries (keep in mind “middle class” will be different that the US version of the term) that I, and many others, have been writing about for years. There are ETFs galore to invest in to capture this space (talking more broadly than just China), many domestic stocks that are beneficiaries of this theme or foreign stocks that are building the infrastructure or servicing it. Globally this theme has a long way to go in terms of time. I think the article is implying a shorter shelf life for this in China than I think is actually the case. As roads connecting the more modern east with the rural west are built, dramatically reducing travel times, manufacturing can move to the west where it will be cheaper for a while thus bringing the potential for middle class life to the rural part of the countries as opposed to people migrating out of the rural areas seeking an improved quality of life.
China’s gradualist approach to economic policy has been a big part of its success. The country avoided the turmoil that some of Eastern Europe experienced when it switched almost overnight to a market system.
If turmoil has been avoided I think it would be because China has much deeper pockets than any of the Eastern European countries. The article gives plenty of attention to the overcapacity issues and these loom as real threats but it seems China understands that there is a threat from this, less clear is if they understand the magnitude and whether things they are doing to cool of certain parts of the economy will be effective.
The government holds down the price of coal, oil and other natural resources, hurting interior provinces that produce these resources to the benefit of coastal exporters that use them. Beijing also sets a ceiling on interest rates, which harms households trying to build a nest egg and helps capital-intensive businesses that borrow to expand.
The above paragraph highlights some of the complexities that go with investing in China. Investing in China has never not been complex and complex isn’t going to go away soon. My thoughts on how to invest in China have focused on parts of the economy where money must be spent, is obviously going to be spent while trying to avoid parts of the market that seem to be right in the line of fire of overcapacity and speculation. This translates, to my way of thinking anyway, to materials, energy, things consumers must use, things that consumers want to use while avoiding banks and insurance companies. I have also avoided tech names as well but don’t feel they are must avoid as I do with financials.
In client accounts I first owned an oil stock, then a phone stock but now only have very light exposure via a couple of ETFs with the expectation of adding consumer exposure later one way or another. I remain convinced that toll road stocks are a great way in fundamentally but for now the liquidity is not sufficient to buy anywhere close to across the board.