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Op-Ed:
A Tale of Two Chinas... Consumers Vs. Industry |
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There's
no doubt China's been an investment focal point since late last year. The
country's government was the first to embrace a stimulus plan, and almost
all of that money was put into action in the first half of the year. And,
it seems to have worked. China's GDP grew at a pace of 7.9% in Q2 rather
than the expected 6.1%.
 Investors
- pretty well aware a number like that was coming - have been plowing
into any stock with the word 'China' in it since late last year. Or, any
U.S.-based stocks with heavy exposure to China have been just as desirable.
It wasn't a
bad move necessarily... the Shanghai Composite Index gained 81% from the
end of 2008 through July. Though its A-share market is closed to foreign
investors, ADRs and the country's second-tier stocks are fairly accessible
to the global community. Even U.S. stocks with strong China ties felt the
bump.
So what's
wrong with that? Nothing, as long as one understands China is (so far)
not the end-all, be-all haven for investment dollars.
The problem
is, most investors don't know that. All they know is what they've
heard and seen. Indeed, off the cuff statements like "China is where
you want to be right now" (an actual quote from a reputable advisor)
are vague at best, and misleading at worst - it's not the whole
story.
Say What?
China's industries
appear to be doing fine, bolstering the case that its manufacturing, construction,
materials, infrastructure, and even its financial stocks are indeed "where
you want to be". China's consumers, on the other hand, aren't nearly as
healthy as its industries.... perhaps because they weren't the targets
of the infrastructure-intense stimulus plan.
China - for
lack of a better way of saying it - is unemployed. Though only glimmers
of this reality ever make it onto the media's radar, unemployment there
is as nasty (relatively) as unemployment is anywhere else in the world
right now. The official unemployment rate in China is a seemingly-palatable
4.9%, but the 'official' figure doesn't take into account the 60% of the
work force that works in the private sector. Historically, the real rate
of unemployment has been about 1% higher than the official registered rate.
 While
unemployment, say at 5.9%, still doesn't seem that bad, for China it's
about a 30 year high... a level its particular economy can't offset for
very long. Yet, many consumer-oriented stocks have made a China-based rally
side by side with industrial-based stocks. And therein is the dilemma.
The state can
- and likely will - continue to support its industries with favorable
conditions, if not outright cash. The worst case scenario is that it will
print money to do so. The state, however, simply can't wave a magic wand
and reign in the real unemployment woes of its consumers.
And make no
mistake... the woes are real. Though the government prodded its state-owned
banks and lenders to lend like crazy in the first half of the year no matter
the credit risk, it's already starting to haunt them. The amount of credit
card debt that was more than two months behind in payments in for the first
half of the year jumped by 133%, according to the People's Bank of China.
Worse (but perhaps
wiser in the long run), the credit spigots were turned off by the central
banks last month. In June, the total amount of money loaned came in at
a whopping $224 billion. In July, the total was $52 billion. In August,
the number sank to about $36 billion.
In other words,
a big chunk of China's citizens are either unemployed, behind on debt,
or can't get credit any longer... or some combination of all three.
That doesn't exactly bode well for companies - or their investors -
who are relying on Chinese consumers to post big fiscal improvements this
and next year.
The Upside
There's a flipside
though.... the industrial side. While the country's consumer market may
be a liability, its industrial stocks are still apt to be an asset.
Though there's
no serious chatter yet about a second wave of Chinese stimulus, it is interesting
that China will be issuing government bonds for the first time ever later
this month (in Hong Kong). It will only be about $879 million worth with
this tranche, but one has to wonder if this is a simple test of the waters,
with a bigger goal of adopting the U.S. model of raising funds by issuing
debt. Either way, the state's government is clearly raising money for something;
the further globalization of the yuan is a fortunate side effect.
 Whether
it's a one-time event or a warm-up round for more of the same later, the
sale of those Chinese treasury securities means someone other than China
could help the government throw some cash at its preferred targets - energy,
manufacturing, telecom, and financials. Retail, entertainment, healthcare,
and similar industries aren't likely to be as lucky.
That alone makes
a solid case in favor of China's industrial companies and against
the country's non-industrial business (and the same principle applies to
U.S. stocks with Chinese customers). But, that's not even the biggest reason
investors may want to delineate their exposure to China.
No, the government
wants certain industries to do well - and will do whatever it takes
to make sure they do - largely because they own big stakes in the underlying
companies.
They're called
state-owned entities, or SOEs for short. At one point in time the government
owned full stakes in almost all the country's businesses. Now that figure's
down to an estimate of 40% to 50%, and it's only a partial-ownership basis
in many cases. Still, it's a very direct vested interest... one that tends
to give those SOEs a measurable edge.
The challenge
for investors? Not even all state-partially-owned entities offer publicly
trades shares, and the ones that do are still hard to access. They're there
though, as are ADRs. And, there's a trickle-out effect to U.S. companies
with Chinese customers. For instance, Caterpillar (CAT) acts as an equipment
supplier to SOEs working on infrastructure projects. Those companies and
they're publicly-traded partners are apt to continue to do well, even if
it's an artificial demand.
So, the message
to investors is quite simple - the China buzz was overly-optimistic. Some
of the alleged opportunities from China are real. Not all of them are though,
particularly
if they're relying on China's consumers. Choose carefully, as the euphoria
that carried all stocks much higher won't be able to keep all of them at
those levels.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
