I've been reading a lot of nonsense lately making the case for a China bubble. The reports saying that the 10.7% GDP growth cannot continue, and that the property market is overvalued and set to pop when the government cracks down on lending...
Former Asian Chief of Morgan Stanley Andy Xie says, "China's property market 'bubble' is set to burst as the government curbs credit growth and clamps down on speculation."
Poppycock, I say. I'd like to point out that Xie is best-known for calling 10 of the last three bubbles... meaning he calls a lot of bubbles, and occasionally one actually happens.
The truth is that the generals are fighting the last war. Just because the U.S. economic decline was based on a real estate collapse does not mean that China's economy will do the same. There are very real differences.
Seven Reasons to be Bullish on China
1. China's cash-fueled bubble trumps a credit or debt-fueled bubble.
For one, China is being driven by cash — not credit. (You may remember this thing called "cash" from back in the day...)
If you count public and private sources, China has 5% to 6% of global GDP in cash; if you count the broadest measures, China has almost three trillion dollars in foreign reserves. And the economy and tax revenues are growing — not shrinking — as they are in other parts of the world.
2. Jim Rogers likes it.
The first time I met Jim Rogers — the guy who wrote the quintessential Investment Biker — I was at a small speaking engagement in New York that took place at one of those English-sounding hotels along Central Park. I'm sure he has no recollection of me.
Jim had just gotten back from a trip around the world with his very young wife. The two of them had driven a yellow, custom-made, 4WD Mercedes over every continent... while pulling a trailer, no less. He wrote about that trip in the book Adventure Capitalist.
Mr. Rogers said a lot of things at that event, but one thing stuck with me. When asked about the housing bubble (this was back in 2006 or so), he said to short the investment banks. When asked which ones, his reply was, "all of them."
He was absolutely right.
Right now, Rogers is saying that China's economy is not in a bubble. But he says there are certain areas where real estate is overvalued. Bloomberg quoted him as saying, "property prices should decline in Hong Kong and Singapore. But China's economy as a whole isn't in bubble territory."
3. China will soon have the largest transportation network.
When I was a schoolboy in the 1970s, every civic class I took touted the Eisenhower highway system as being one of the greatest growth engines ever produced. The textbooks claimed that because the United States had more highways — of superior condition — than any other country, goods could flow from coast to coast with ease.
I don't know if they still teach this, but I do know that the U.S.'s lead on its road network is about to end.
China just spent $586 billion (plus additional trillions in loans) on a stimulus package. And a lot of this money is going towards highways, railroads, and airports.
According to the Malaysian Insider, "[China's] infrastructure spending had been increasing by an average of 20% annually for the past 30 years — a tried and true engine that has helped power the Chinese economy's explosive growth."
Plans call for China's highway system to stretch 85,000 kilometers by 2020, surpassing the roughly 75,000 kilometers of interstate roads currently in the U.S.
There was a time when Americans could build an airport on a volcanic island in three days. Now we spend 10 years bickering over the rebuilding of the World Trade Center. I've yet to hear a date on the grand opening...
4. China is now the number one auto market.
Naturally, if you build roads... people want to drive on them.
In 2009, a total of 10.3 million passenger cars were sold in China — up 52.9 percent from just a year earlier. Domestically-branded cars accounted for 30 percent of this total.
Nick Hodge of Alternative Energy Speculator says, "The Chinese auto industry is growing in an exponential fashion. And it's not all old fashion gas engines. There are 50,000 taxi cabs in Shanghai that run on natural gas. But the fastest growing company makes a battery-powered car. The best stock to buy is up 400% already, and it's going to quadruple again."
5. China boasts public sector savings and low debt.
The average Chinese citizen saves 36% of his income. He can do this because the cost of living is far lower than in the United States. There is almost no credit card debt, and all mortgages require a 30% down payment.
6. Chinese manufacturing is still rockin'.
According to the Wall Street Journal, the HSBC China Manufacturing Purchasing Managers Index rose to a record high of 57.4 in January from 56.1 in December. A PMI above 50 represents growth — and this is the fourth month in which the PMI has grown.
7. Oil production is increasing in the Middle Kingdom.
The Chinese oil major CNOOC jumped 10% on news that it was increasing production by 28% for 2010. Bloomberg reports: "The forecast says a great deal about the likely trajectory of China's manufacturing and transportation industries for the balance of the year. But it is also a reasonable guide to oil demand, which so far analysts have expected will be modest this year."
Oil companies don't increase production unless they believe that it will be met by an increase in demand. CNOOC has 2.8 billion barrels of proven reserves and a market cap of $7.1 billion. They obviously think that the moderate global growth picture — which the future market equates to $75 oil — is wrong.
The only conclusion to be made is that China's growth track for 2010 is much better than most experts think.
China: A Giant Commodity Vacuum
The bears are flat-out wrong on China. GDP for 2010 might drop from above 10% to only, say, 9%... but that's still better than you can get anywhere else.
Manufacturing numbers are hitting records; exports are up; oil demand is increasing; there is a cash surplus and pent-up demand from consumers for high-dollar items, like cars... These things all suggest that China will continue to be a giant vacuum cleaner, sucking up the world's commodities.
The position of power belongs to those countries that will sell to China the raw materials it needs to be the factory of the world.
