Investing in China Gets Contrarian
An investment quiz to begin today’s note. Two-part question:
1) Which country has more money to spend than any other?
2) Which nation currently represents the least-attractive investment environment? In other words, where is the one place a true contrarian would love – where no one wants to invest?
The answers lie in our favorite headline of the day: China has agreed to invest billions in Greece’s port system.
After some lousy pre-crash investments in Blackstone, Morgan Stanley and Visa, Chinese state money is finally wising up. Today, China announced 14 separate deals with the Greek government, tourism industry, telecoms, shipping companies and shipbuilders – all designed to give the Chinese virtual control of Piraeus, a mega-port outside of Athens.
Coupled with previous deals, China will now have a huge presence in the vital shipping channel between the Mediterranean and the Balkans. And they’ll likely be getting it all on the cheap… Just this morning, Fitch became the last ratings agency to downgrade Greek debt to “junk” levels, leaving Greece with very few – if any – bargaining chips for negotiations with the Chinese.
Vice Premier Zhang Dejiang is in Greece as we write, striking the deal, which is estimated to be worth billions. Greeks need cash so badly, there’re rumors floating around that a hefty chunk of the national railway is up for sale, too.
“Given China’s consumption of raw materials, the spending binge is not likely to stop,” writes Rich Lee, the latest addition to our squad of analysts (he’ll be helping Rob Parenteau devise investment strategies for The Richebächer Letter).
“Beijing has already secured access to raw materials, metals and crude oil. The next step will be in the areas of real estate and commodity deposits – massive oil fields in Africa, or property laden with copper in Chile and Turkey. One thing is for sure: The Chinese will continue to target components closely tied to the economy.”
But – the ultimate question – will Chinese consumption, both domestic and international, eventually collapse under its own heft? Japan went on a similar global shopping spree in the ’80s…and soon after fell into a bear market that’s still raging today.
“Bubbles are a part of the weather patterns of markets,” writes Chris Mayer. “They appear every so often, like cloudy days. So what about China? In the big cities, apartment prices have doubled or tripled in the last three-five years. Bank lending is up fourfold since 2008, and the government stimulus package means a lot of temporary activity in construction.
“I put the bubble question to nearly everyone we met when we visited China last month: money managers, economists, entrepreneurs, etc. It’s the pressing question everyone wants to know. And I’ve talked about the issue in my weekly e-mails to Capital & Crisis and Special Situations subscribers, so I don’t want to rehash it all here. I could write the whole issue on this question.
“The bottom line about investing in China: There is surely a property bubble in China, though smaller and less leveraged than the US vintage. But it doesn’t change the long-term picture of what’s happening in China. As one hedge fund manager put it to me, ‘China is many mini-economies.’ He is sure there is a bubble too, but I note he’s still investing in basic areas like food and water, which are less connected to the property market.”