China Boom or Bust... Does it Even Matter?

We open this morning with a few questions: Is the Chinese economy in the throes of an epic bubble and, therefore, on the verge of collapse?

Better yet, does it even matter?

These are not academic questions. We’re getting on a plane to Beijing tomorrow morning to scope out a potential business partnership there. Bill Bonner will be joining me, along with Chris Mayer and Joel Bowman.

But it’s also an important question if you’re an investor, says Chris, “because China is the world’s second largest economy, and it hits above its weight as far as commodities go. It is the most important buyer to watch when it comes to everything from oil to iron ore. So if China tanks, so do the prices of many commodities.

“Even beyond that, China is the growth engine for a host of US companies.”

We’re, of course, reserving judgment until we see what’s on the table. Nor are we likely to take sides in a debate that has Marc Faber on one side (bearish) and Jim Rogers (longtime bull) on the other. But wend our own path…and bring you along for the ride.

“I do think,” Mr. Mayer continues, “the time frame has a big part to do with how you view the world. China will certainly have nasty recessions and busts. But over the long term, this market is growing. You only have to look at the results of the companies involved to see how far it has already come.

“And that doesn’t mean that everything in China will do well. We have to be careful not to paint with too broad a brush. Just as in the US, there will be pockets of opportunity. In China, for example, I don’t think I’d want to be involved in the frothy property market of the big cities. I wouldn’t want to invest in its opaque and undercapitalized banks.

“On the other hand, I would invest in ideas that link to the agricultural scene. There is clear demand and growth and constraints – in water and arable land – that one can deal with in only so many ways. I would invest in uranium, which ties back, in part, to China’s aggressive nuclear build-out.”

Before we set off tomorrow for a firsthand look, let’s examine a few data points and anecdotes for some clues.

Inflation is currently roaring in China:

  • Consumer prices rose 2.8% year over year in April – their fastest pace in 18 months
  • Producer prices rose a staggering 6.8%
  • Housing prices rose 12.8% – their highest since records began five years ago.

The housing numbers are even more astounding when you consider Beijing’s attempt to slam the brakes midmonth.

Among the measures taken: A demand for higher down payments, and a ban on lending for the purchase of third homes (!)

Sure enough, it put a lid on home sales month over month…

China Housing Sales Decline

But it did absolutely nothing to put a lid on prices.

Something’s got to give. Either interest rates have to rise, the yuan allowed to float or both. But when that happens is anyone’s guess.

So what does an upwardly mobile Chinese citizen do with his money when inflation is raging and housing prices lead the way?

Bloomberg News shares the story this week of Pan Weitang, a 27-year-old accountant in Shanghai with $59,000 in savings. (Yes, you read that right. And that’s not atypical.) Chinese law pretty much limits her to three options on where to put her money:

  • A bank account in which interest can’t keep up with inflation
  • Property which is increasingly beyond reach
  • Domestic stocks.

You get one guess about which she’s doing now. And she’s definitely not alone. So even though the Chinese market in Shanghai entered an official bear market earlier this week – it’s down 20% from last November – a new flood of middle-class savers are “buying the dip.”

“It becomes a question of who’s the least ugly girl at the fair,” Victoria Mio told Bloomberg. Mio is a Hong Kong-based senior fund manager at Robeco Group. Robeco is forecasting a second-half rebound. JPMorgan Chase expects Chinese stocks to rally more than 40% this year.

Our friend and potential partner in Beijing is eagerly awaiting pending legislation that will allow mainland Chinese to invest overseas. But for now, it looks like the official line is to keep those savings at home.

Addison Wiggin

for The Daily Reckoning