Chinese Domination: 5 Reasons the Dragon Will Breath Fire in the World Economy in 2013
Luke is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If someone were to survey a random sampling of the people closest to me, he might conclude that I am a die-hard cheerleader for Chinese investment. I would argue, however, that this is not the case. For if I am a cheerleader I am a poor one, at best, for I only cheer when the team is winning. At worst, I will abandon the team when it becomes obvious to me that the tide of the game is turning. With China, I have cautious but enormously strong optimism that its dominance will be unmatched for at least the next year and perhaps through 2015. It is not an unwavering support, but then again, the math is compelling.
The following is a list of the five top reasons that I believe China will lead the world in 2013.
Population: With five times as many humans than the US, the burgeoning middle class in China is quickly becoming a formidable force for the consumption of both domestic and imported goods. If only 20% of the one and a half billion-strong Chinese population achieves middle-class status, a purchasing engine as large as the US population will have been created. While Europe and North America are seeing stagnant to negative growth projections for 2013, China will be able to weather the storm better because of this rising internal force. Look for dips in price for energy companies such as PetroChina Company Limited (NYSE: PTR) (ADR). As the macro-trend of rural population in China moving in droves to cities becomes more prevalent this year, energy consumption is slated to rise by 5% (conservatively) through 2015. Because PetroChina is effectively state-owned and domestically oriented, I think it is a buy in the $140 range where it now sits. China Telecom Corporation Limited (NYSE: CHA) (ADR) will also benefit from this influx into urban areas of Rural population. They have a strong 3G customer base which will transfer well in the current shift in China from voice to data services. Plus, 4.6% sequential growth in November 2012 is a positive sign.
Growth: Although China’s double digit GDP growth numbers seem to be consigned to the halls of history, a very respectable 8.6% has been predicted by the Economist Intelligence Unit. This far exceeds the economic projections of any Westernized economy and eclipses the US (2.1%) by over a factor of four. Even exciting growth stories like the Philippines (6.0%) and Indonesia (6.3%) seem somewhat anemic by comparison. Interestingly, the other high-ranking growth countries on the list are either directly linked to the Chinese economy or are rife with unnecessary geopolitical risk.
- Mongolia – 18.1% - Chinese demand for energy and minerals
- Macau – 13.5% - Chinese gambling Mecca
- Libya – 12.2% - Starting from a very small base and China imported 10% of Libya’s oil in 2009
- China – 8.6% - Tentacle like reach into nearly every industry
- Bhutan – 8.5% - Chinese demand for energy and minerals
- Timor –Leste – 8.3% - Chinese demand for energy and minerals
- Iraq – 8.2% - Starting from a small base and Chinese state interest in at least two large oil fields
- Mozambique – 8.2% - Chinese demand for raw materials
- Rwanda – 7.8% - Chinese demand for raw materials
- Ghana – 7.6% - Chinese demand for raw materials
Plainly, China is the only choice to be made here since even the riskier bets are largely tied to China anyway. In addition, risk can be further minimized by considering a Chinese Exchange Traded Fund (ETF) like IShares FTSE China 25 Index Fund (NYSE: FXI).
Politics: Yes, that’s right. The semi-totalitarian leanings of Chinese politics will provide a distinct advantage over waffling, rudderless Western political structure as evidenced by wave after wave of Chinese stimulus packages supporting infrastructure and employment. The huge surplus of trade that China now enjoys enables politicians to write blank checks for projects that would take years of infighting in Western Europe and to a smaller degree the US to accomplish. The time to develop infrastructure is now when the world economy is in the doldrums. Just as it is always wiser to buy investments when the market is down, governments throughout the world should be doubling down on their future while inflation is at a snail’s pace and interest rates are for the most part miniscule. This is a lesson the world should have learned after the Great Depression where austerity caused a lengthier and more painful recovery than was necessary.
A lot of cash lying around helps, as well. With a trade surplus of 19.6 billion last year (according to tradingeconomics.com), China is well poised to invest in its future while more developed countries are scaling back investment at a time when they should be in a buying frenzy. Although it is a Korean steel manufacturer, POSCO (NYSE: PKX) is a firm well poised to profit from the Chinese infrastructure expansion, as it has been a huge supplier of steel to Chinese projects for many years. The connections it has made throughout the years with key players in Chinese government will pay dividends in this latest round of stimulus.
Trade: China will further benefit in 2013 from a scaling back in price of the things it imports (commodities) and an expansion in price of the things it exports (IT services and software/hardware and retail goods). Similar to the path that Japan followed during its ascendancy toward world economic power after World War II, we are seeing higher quality goods further up the production chain coming from China.
2013 will see more innovation from Chinese entrepreneurs, rather than simply reverse-engineering and copying Western inventions. The Chinese will draw a secondary advantage from working with companies from developed nations that come to China to sell goods because the Chinese government nearly always requires some type of technology sharing as a price of admission. This will help allow China to achieve the same industrialization that took Japan four decades to accomplish in just a few years. The market for Chinese automobiles will expand in China and beyond this year so look at China Automotive Systems (NASDAQ: CAAS) and consider buying on any weakness. In May of 2012 the Chinese government announced a subsidies program for the purchase of fuel efficient and low-emission vehicles. They have lowered interest rates and oil prices, as well. Look for a bumper year for domestic sales of both autos and parts in China.
Dominance: The Chinese story is not a singular one. We will see very respectable growth from the so-called BRICIPs (the acronym for the larger, quickly developing economies of Brazil, Russia, India, China, Indonesia, and the Philippines). As they grow, they will both compete with China for exportation and depend on China for imports. Also, European and American blue-chip companies realize that the Chinese market is integral to their futures and to miss the China boat is an eventual death sentence.
Unfortunately, 2013 will be marred by trade barriers and plenty of gum flapping about an eventual trade war. But ultimately, this will amount to smoke and mirrors; a magic trick we have seen played over again and again over the last couple of years. In 2012, for example, the US imposed 36% tariffs on solar panels imported from China as punishment for Chinese companies allegedly dumping (selling below cost) solar panels into the US market. Shares of Chinese solar panel manufacturers such as Trina Solar Limited (NYSE: TSL)(ADR) plummeted. Within hours of the news, Chinese companies were already figuring out where to accomplish final assembly of these goods since the restrictions only apply to “solar panels produced in China,” (a suspiciously convenient loophole for companies with the kind of pull to start a very painful trade war with the US). Trina Solar has the international footprint to shift final assembly to other countries to dodge these tariffs. After a recent round of state stimulus spending, TSL is again heading northward. It seems that no one really wants to shake the hornet’s nest when it comes to the largely Communist-affiliated business magnates of the modern Chinese economy.
This tip-toeing around China gives them a strategic advantage in geopolitical dust-ups such as those involving the disputed islands in the South China Sea. Although, the media has brought the case into international view, very little has been done to block China’s claims to this cornucopia of energy and wealth. This type of economic presence mirrors that of the US during its vice grip on western politics after the Second World War
Once after pointing to China on a map, Napoleon famously said "There is a sleeping giant. Let her sleep! For when she wakes, she will shake the world." I am afraid the Giant is finally awake.
lukey911 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!