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As the title
of today's take indicates, President Barack Obama's recent visit with Chinese
Premier Wen Jiabao was successful in the sense neither party ever stormed
out of a meting room on the other one, and there were several publicity
opportunities. As for any real economic or political progress that
investors would care about, the visit probably didn't make a dent.
We've got some
details and concepts about China's economy below that didn't seem
to get quite as much attention this week as the Presidential visit did.
Before we dive into it though, note we've added a couple of blog entries:
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China
Pays Polite Lip Service to President's Economic Agenda |
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On
September 18th, the Micro Cap Press published an article that surprisingly
didn't stir up a strong debate. The premise of the article was simply that
the
investment gambles on China's personal consumers (as opposed to
industries and institutions) were far too optimistic - China's consumers
are in no real position to pull the globe all the way out of its financial
rut.
A few of the
key data points we posted at the time included:
-
 China's
unemployment was at 30 year highs
-
Lending in China
was up 28% in the first half of the year
-
Credit card delinquencies
(late by two or more months) were up 133% in the first half of the year
-
About 1/3 of China's
recent college grads can't find work
In the meantime
we learned credit card issuance in China was up 32%, while total credit
card debt had increased by 130% for the same timeframe.
Though the spending
spree (even if on credit) points to greater personal consumption, the worry
is clear... consumers can't spend more than they can afford forever.
That was our concern then - that China's consumers weren't going to
be able to deliver on the hope offered by all the 'growing consumer class'
buzz.
Now fast forward
to today, while the market is still digesting the results of President
Obama's visit with Jiabao.
All Bark,
No Bite
China's Premier
verbally acknowledged that he sought the same trade balance the U.S. sought,
since (in President Obama's words) "We can't go back to the era where
the Chinese ... are selling everything to us." And, the President's
right - U.S. consumption of Chinese goods sent an unhealthy amount of U.S.
currency overseas.
 Of
course, one of the ways - perhaps the only meaningful way - to achieve
that balance is for China to de-peg the value of the yuan to the U.S. dollar.
See, though
the value of the dollar has weakened, the yaun has followed it every step
of the way. That's why the trade balanced (relatively) has remain unchanged.
By letting the yuan appreciate to its actual value rather than leave
it at a dollar-based benchmark, the Chinese have greater buying power for
U.S. goods, and U.S. consumers have less buying power for Chinese goods.
As said above, that what both country's leaders just agreed they wanted.
And, the maneuver will let/force China to fuel the bulk of its own growth
with internal consumer demands rather than rely on exports to do so....
a proverbial win/win.
The problem?
Premier
Jiabao has much to gain by not following through, and much to lose
if he does follow through; China is not going to switch economic gears,
and likely won't even discuss de-pegging the yuan to the U.S. dollar once
Air Force One lands in the United States again.
Why?
While the idea of growing China's personal consumption is nice, statistics
show only about 8% of its population has any meaningful discretionary
income (earns more than $5000 per year). Other estimates suggest that
200
million of the country's 1.3 billion citizens are 'affluent', which works
out to be about 15%. You get the idea either way though..... China's
stores, shops, and malls may be packed, but the vast majority of
the Chinese are staying away in droves.
Catch 22
 On
the surface, the solution is more and better jobs. If unemployment moves
lower, and wages rise, consumer spending may go up at least noticeably.
The inherent problem with such a solution is brought to light with one
question... what jobs? The country has spent the last several decades
creating a massive amount of capacity for industrial production and export
business. You could put the millions of unemployed people back to work,
but the jobs would be in the industrial and export arenas. To keep those
workers busy, industrial consumption and exports would have to increase
- a step in the wrong direction, and a difficult trap to get out
of.
To put it all
in simpler terms, though the U.S. can and does, China can't support
itself with its own consumers. You can tweak either discretionary figure
proportion you want (8% or 15%) ... it still won't make a dent.
That's why 2/3 of China's industry is centered around exports, and only
about 1/3 on personal consumption.
Though things
can and do change in time, expecting Premier Jiabao to want or even be
able to change that level of internal consumption in China is just naive,
despite
what he publicly said yesterday. There are way too many growing pains involved,
particularly when the global economy is this fragile.
Bottom Line
As for what
this means to investors, there are three take-aways:
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We reiterate our
September 18th point that Chinese consumers can't save the world's economy.
Their growth and spending habits aren't even sustainable at current levels.
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We don't expect
the yuan to start trading freely; it will remain weak with the dollar as
long as U.S. consumers (and its close trade partners) buy Chinese goods.
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China will not
be able to turn away from its export-oriented nature and become a consumer-oriented
entity for several reasons, the biggest of which is that the bulk of the
current infrastructure and political arrangements support export businesses.
We bring these
key points up today simply because we know Chinese companies - and its
micro cap companies in particular - are of great interest to our micro
cap investor audience. There's no doubt the country's loaded with investment
opportunities. The ones that are export-focused or industrial are likely
to do well as the recovery takes hold. The ones that are relying on a surge
in China's consumer spending, however, may not live up to expectations.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
