China: Where Has The Enthusiasm Gone?
For the past five years China has been a darling amongst investors. China has growth, size, an awakening entrepreneurial spirit and a one party government, that in stark contrast to the U.S. Congress, seemed to get things done. But lately investors have seen the China glass as being “half empty”. So what has changed and what of the opportunity still remains?
What has changed?
- Fear has increased about a fixed asset bubble in China, particularly in housing (despite 30% plus down payments required on average for home purchases).
- In an effort to thwart inflation, China’s monetary policy has tightened and investors don’t like to fight the government in China.
- Several high profile corporate governance blowups in Chinese companies have shaken investor confidence (e.g. Alibaba, Mecox Lane and China Media Express).
- The situations in Egypt and Libya reacquainted investors with the sovereign risk associated with emerging markets.
- The Japanese tsunami and nuclear aftermath have negatively impacted one of China’s largest trading partners and there is fear economic turmoil could spread.
What hasn’t changed?
- Developmentally, China is where the U.S. was several decades ago. While it paid to invest in the U.S. over the last 50 years there were periods of correction and setback.
- China’s fiscal situation is much stronger than other developed nations in our opinion. Consequently investors in China are likely, in our view, to benefit from an appreciating Chinese currency.
- The Chinese population is large and growing in affluence aided by government policy supporting domestic consumption. Many experts indicate China’s middle class will be larger than the entire U.S. population by 2025.
- China has created a “right of first refusal” on much of the world’s natural resources after years of funneling profits generated from U.S. consumer spending into resource investments around the world.
- China has efficient, modern infrastructure that prepare it well for future growth. Infrastructure investment continues at a brisk pace especially in many rural cities where the next wave of growth is expected.
- China has unrivaled manufacturing capability from a price and scale standpoint. Increasingly this capability will move up the value chain as China shifts more of its low cost manufacturing inland to rural cities, leaving its more sophisticated port cities to focus on highly engineered and branded products.
- China is just starting to establish a service economy to address the needs of its more urban and affluent base.
- China’s single party system gives clarity to government policy so that capital allocation decisions can be made with an adequate time horizon.
- China’s role in global economic influence will continue to expand.
So what is the major difference between what has changed in the China story and what hasn’t changed? The changes impacting the market today all appear to be temporary in nature and will correct themselves in time. What has not changed are mostly long term competitive advantages. To be clear China is far from a perfect economic engine. Its rule of law, restricted markets, currency manipulation and reliance on exports all need to be improved. But when it comes to investment, China should not be ignored.
In closing, I am reminded of the very famous Warren Buffett quote, “In the short-term the market is a voting machine. In the long run, it is a weighing machine.” To put it more succinctly I will offer my own opinion, “Invest in China, your grandchildren will thank you.”
For my next blog entry I will offer some thoughts on different ways to invest in China.
Author: John P. Micklitsch, CFA Senior Vice President Ancora Advisors, LLC.
Ancora Advisors, LLC is a SEC registered investment advisor located in Beachwood, OH with approximately $2 billion in managed assets, including a dedicated China strategy which Mr. Micklitsch manages on behalf of the firm. In that capacity Mr. Micklitsch travels extensively throughout China and is a frequent speaker on China related topics.
All views expressed are opinions of the author and are not an offer to buy or a recommendation to sell any specific security or adopt an investment strategy. All investments involve risk and investors should consult their investment professional on how the purchase and sale of securities can be implemented to help achieve their investment goals and objectives within their personal risk tolerance.