China in your hands

Earlier this year China swooned, or to put it more correctly the price of the SHCOMP index swooned. I.e the valuation at which investors attached to the equity market within China.

Media was full of prophetic statements and most simplified it down to whether China was having a hard landing or soft landing. Hard landing sounded so much better as the charts showed a market in mark down mode.

Now that things have calmed down and the media have other things to write about lets take a quick look at China after their top level management just met and delivered (unofficially of course) their summary on the economy and how things might look going forward.

According to unofficial sources (as that is often the best you can get from China) ministers agree on what I have been thinking for some time.

If you build them they will come.

China engaged in a very ambitious and fast paced infrastructure spend that kept the world and specifically the resources sector ticking over during and in the aftermath of the financial crisis. Commodities sector was ablaze and now we are witnessing what happens when a powerhouse steps off the bid. Oil, metals etc are all suffering from serious price drops that is challenging the fabric and design of the industry.

China needs to look after China, and now plan to fill all these apartments, shopping malls, railway links, highways etc etc etc. They have built the foundations of creating a better standard of living and life for their citizens and now the focus is on transitioning their economy to be more diversified.

The Chinese leaders understand they cannot exist and prosper in the future by relying on being the manufacturing base for the world. we all know production always seeks the cheapest conditions. They can still maintain a world beating manufacturing industry as PART of their economy and always will but much the same way that America was once a manufacturing powerhouse this simply will not last as a competitive advantage for years to come and therefore China must transition itself.

You may question their human rights issues (which exists in all countries to varying degrees and acceptability) in China but you have to hand it to them for their foresight and management, it may still all blow up, but at least there is a plan.

Chinese leaders speak of an “L” shaped recovery, perhaps this is the best approach to take. i.e. static steady growth for the next X period of years. And certainly seems to be a more sensible approach than trying to satisfy Markets and shooting for + 8% growth year on year which is unsustainable.

China is like watching a human being growing up, we have gone through its infancy, seen it grow big and tall through its puberty and now we are witnessing them graduate into the big leagues. they have learnt lessons along the way and it is up to them to implement and grow into them.

My guess is that by the time I retire China will be akin to what America was. A powerhouse economy that shapes the world direction. An educated, hard working workforce that simply wants to improve their lives. Unpopular thing to say but mix a bit of communism with capitalism and manage it correctly and it seems to go a long way.

Some useful tips  for thinking about China:

  1. America did not just wake up one day as the most powerful economy it took time and plenty of boom and bust before it happened.
  2. Stop debating about the Official growth rate or being skeptical about the figures given out the by the government bureaus- if you think you can do a better job of estimating the official GDP figures in China, knock yourself out, otherwise stop wasting your time.
  3. The price and more importantly fluctuations of an index designed to track equity prices IS NOT AN ECONOMY. it is a numerical value created to track equity prices.
  4. China is a large complex beast, they will have up and downs like any country, just because you dont understand it, never been there or haven’t a clue about the language does not mean the economy will crash.
  5. They more than likely do have relatively lower standards of corporate governance that the regulators need to resolve before investing there is “safer” for the average joe, so buyer beware.







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