Observations from China - Monty Guild
Monty Guild is an investment advsor and founder of Guild Investment Management. He's also a frequent contributor of macroeconomic analysis and commentary to Jim Sinclair's popular jsmineset.com blog. I found his observations from a recent trip to China pretty bullish, and I'm guessing you Fools will find it interesting. Enjoy!
RECENT CHINA TRIP SUMMARIZED
An analyst friend and I recently took a trip to China. Although I had been to China many times, I particularly enjoyed the trip because it was my friend’s first visit. Seeing it though his eyes I re-experienced some of the wonder of the enormous current and future success that is China. If you wish to understand what China is and how it will impact the world in the years to come, I suggest that you pack your bags and take a trip there yourself.
There is really only one way to describe the China that I saw on this trip: BOOMING. Airplanes are full. Hotels are full. Traffic is busy on the streets. Chinese families are eating expensive meals in high end restaurants, and businesspeople are making deals in the private meeting rooms of exclusive hotels. Chinese consumers are in shops buying goods, in auto dealerships buying new cars, and of course, buying new homes and apartments.
We have written much about the economic growth seen there. However, I did not expect the current boom to be stronger than it was a year ago when I last visited China. I had expected the construction boom to peak when China hosted the Beijing Olympics, but I was wrong, there are more construction cranes in Shanghai and Beijing now than there were a year ago.
As many of you know China is now the number one auto producing and consuming country on earth. During my time in Shanghai and Beijing I saw many Audis, BMWs, Mercedes and high end Japanese cars. I saw few U.S. cars, although though I did notice a few Hummers. General Motors makes a lot of money in a joint venture selling low priced cars in China. Shanghai General Motors Co. Ltd. saw its June sales jump 71 percent year on year. They produced over 60,000 cars in June and may be one of GM’s few highly profitable divisions. Nationwide, over three million cars were sold in China in the first five months of 2009, up 15% from the year earlier period.
Chinese airplanes are full in coach and almost full in business class. There are numerous flights a day from Shanghai to Beijing and they are booked up well in advance. The train stations, airports, waterways and roads are new and beautiful. In my opinion, their infrastructure is much more attractive and well planned than the transportation infrastructure in the U.S. The roads are wide, well maintained, and crowded…especially in Shanghai.
GENERAL ECONOMIC GROWTH
I left for China bullish on the country and its long term outlook, and I returned bullish on its short term outlook as well.
Here are a few economic statistics. China’s GDP grew at a 7.9 percent annual rate in the calendar quarter that ended June 30th. This was above our estimates, and way above the estimates of the average economic observer. As mentioned earlier, China is the number one market for automobiles on earth. China also has fastest GDP growth of any major country. China consumes massive amounts of steel, iron ore, coal and other minerals to drive its immense infrastructure projects.
Huge buildings consume a great deal of steel; as do new electric generating plants, railroads, roads, ships, bridges, tunnels, dams and airports. Today, the Fortune 500 (which is made up of the 500 largest companies in the world on a sales basis) contains 37 Chinese companies. Ten years ago it contained only eight. We quote from an article in the July 21, 2009 issue of Investors Business Daily “…The number of U.S. firms fell to 140, the lowest total ever. But as the Chinese economy keeps expanding fast, experts say the shift will intensify. They predict one-fifth to a quarter of the biggest global players might be Chinese in five to ten years…Analysts say some rising Chinese stars in the high-tech, retailing, publishing, food and other sectors are just emerging on the world stage and are to be listed on U.S. exchanges. Others, like energy giant Sinopec, are on the NYSE and are near the top of Fortune’s list.”
China’s premier Wen recently announced that the Chinese foreign exchange reserves totaling over $2 trillion will be used to acquire companies all over the world to build the store of assets to fuel China’s remarkable growth. This has been expected, and is something that we have been pointing out for quite a while. China must grow their inventories of raw materials to achieve the remarkable economic transformation that they are undertaking.
EXPORTS FROM CHINA
Exports, which some observers felt would be China’s undoing, are a smaller percentage of GDP with each passing quarter. Clearly, in spite of declining exports, China is booming. Most of China’s exports go to emerging Asian markets, secondly to Japan, then to Europe and last to North America. Though exports have slowed with the depression in Europe, Japan and the U.S., China continues to grow. This growth is due to increases in internal consumption, increases in home and second home purchases by Chinese, increases in capital spending to add to China’s already impressive infrastructure, and capital infusions from foreign investors buying shares and real estate. When world wide demand for exports from China heats up again in the next year or two, we will see even more rapid growth from China.
CHINAS BOOM IS SPILLING OVER HELPING HONG KONG, SINGAPORE, TAIWAN AND OTHER ASIAN DEVELOPING MARKETS
Here is an article from a recent issue of the FINANCIAL TIMES.
Optimism over China proves infectious with its neighbours
By Lindsay Whipp in Tokyo
July 20 2009
China’s stock markets have been among the world’s best performers this year, with signs that its various stimulus programmes are keeping its economy growing strongly amid the global slump.
Optimism over China has spilled into the neighbouring markets of Taiwan – itself a beneficiary of improving cross-straits relations – and Hong Kong. Both have significantly outperformed the US this year, begging the question: are they dancing to the tune of mainland China rather than the US?
Steven Sun, senior China strategist at HSBC, said: “Certainly you can say this is a greater China bloc, and it makes sense for policies made in mainland China to have more impact in either Hong Kong or Taiwan so, as a result, if the market correlation becomes higher, it would not be surprising.”
The Shanghai Composite index has climbed 79 per cent this year, while the S&P 500 has gained just 5 per cent. The Hang Seng has risen 35 per cent – including a 3.7 per cent jump on Monday – and Taiwan’s weighted index (Taiex) has rallied 51 per cent after Monday’s 1.3 per cent rise. The H shares of mainland Chinese companies traded in Hong Kong have risen 47 per cent.
Jing Ulrich, chairman of China equities at JPMorgan, says: “Naturally there would be some degree of correlation in the recent performance of markets in Hong Kong and mainland China, since common themes are driving investor sentiment in both markets.”
Among the world’s leading economies, China has emerged as the least affected by the financial crisis, thanks to a swiftly implemented stimulus plan and record bank lending.
The country’s economic growth accelerated to 7.9 per cent in the second quarter – at a time when many other big economies remained mired in recession or subject to anaemic growth. That growth has had an impact on the economies of those markets and countries that are geographically closest to China.
In Taiwan, improved cross-strait relations are playing a significant role in buoying market sentiment. That includes events such as China Mobile’s proposal to make the first Chinese investment in a listed Taiwanese company by buying 12 per cent in Taiwan’s Far EasTone mobile operator.
JPMorgan’s Ms Ulrich also points out that Taiwan is expected to accept mainland investments into selected industries and its banks are set to become more active in the provision of financial services in China. The rise in the Taiex not only reflects Taiwan’s thawing relations with China. Analysts say that since the Kuomintang won elections last year, Taiwanese have been repatriating their savings and investing them in the stock market and property.
Glenn Maguire, chief Asia-Pacific economist at Société Générale, says: “The Taiwan [market] has been playing a process of catch up.” But the closer ties and benefits of the stimulus does not necessarily represent a sharp shift away from correlation with the US markets, to which both Hong Kong’s and Taiwan’s economies retain strong links.
Indeed, the rebound in the Hang Seng and Taiwan only began in early March at the same time as the US and other leading developed economies. The Shanghai market bottomed in early November and has surged 91 per cent since then.
Hong Kong remains highly dependent on international trade, much of which is ultimately driven by the US. Exports make up 60 per cent of Taiwan’s economy. This exposure to global economic trends is not going to change any time soon.
This supports evidence that both the Hang Seng and Taiex remain more correlated to the US markets than to Shanghai for now.
Even last week, when China’s better-than-expected GDP figures were announced, Shanghai closed down and the rest of Asia higher.
In any case, Hong Kong and Taiwan are not the only Asian markets that have rallied this year. The Indian market has risen 57 per cent while Indonesia is 55 per cent higher, suggesting the gains are also linked to a broader Asian emerging market rally.
Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton, says: “If the US is not doing well but is not in crisis, then that can actually be quite a good scenario for Asian stocks. For example the S&P rose just 10 per cent from the beginning of 1992 to the end of 1994 in the aftermath of the savings and loans crisis. Over the same three-year period, Asian markets almost doubled.”
Importantly, the very different investor bases for Hong Kong, Taiwan and Shanghai affects trading patterns. Foreign investors have extremely limited access to Chinese domestic currency mainland shares. As a result, the direction of mainland markets is based as much on momentum and liquidity as fundamentals, analysts say.
Individuals also have very limited investment choices, making the Shanghai and Shenzhen stock markets extremely attractive when they start rising. Recent gains have been augmented by companies investing retained earnings.
Partly reflecting this difference, Chinese mainland A shares trade at a 47 per cent premium to the H shares, according to JPMorgan figures.
Conversely, only about 30 per cent of the shares on the Hang Seng are held by retail investors, HSBC’s Mr Sun says. Fox-Pitt Kelton’s Mr Matthews says H shares in particular are heavily dominated by international institutional investors, which means it has a very tight correlation with the S&P 500.
Although Hong Kong and Taiwan’s links with the US look set to remain strong, the growing influence of mainland China is clear.
As HSBC’s Mr Sun says: “This financial crisis has reinforced the broad trend across Asia that economic and financial power is shifting from west to east.”
The trip was very rewarding and we met many good companies, securities analysts and accounting and legal professionals. We continue to believe that the Asian and Latin emerging markets, and of course oil, gold, China and India remain the world’s most attractive investments moving ahead.
We welcome the thoughts and comments from our readers. Please do not hesitate to contact us if we can be of service.
Thanks for reading.
Monty Guild and Tony Danaher