Concerns about rising consumer prices also ring hollow.
In September, China’s consumer price index rose 6.1%, down from the August reading of 6.2% and the three-year high of 6.5% recorded in July. Although this is markedly higher than the government’s full-year target of 4%, prices are showing signs of moderation. In this instance, elevated inflation is part and parcel of a rapidly growing economy and rising household incomes.
An annual inflation rate of 5% to 6% would spell disaster in the U.S. and other developed nations. However, all indications suggest that the mainland economy can support this level of inflation.
Household incomes have increased steadily in urban areas for the past decade, fueling Chinese consumer demand for all manner of goods and services. Rural dwellers have also prospered in recent years, with the average household income climbing 14% in the first half of 2011.
Higher household incomes translate into greater domestic demand, and Chinese consumers continue to do their part to keep the economy moving. Retail sales during China’s Golden Week, a national holiday stretching from Oct. 1 to Oct. 7, surged 17.5% from year-ago levels to RMB696.2 billion (USD109 billion). (See “Still Golden.”)
Bearish commentators also regard local governments’ debt burdens — estimated at USD1.7 trillion — and a potential housing crisis as obstacles that could derail the Chinese economy. Although this scaremongering plays well to a U.S. audience that’s intimately familiar with the dangers of housing bubbles and government deficits, the situation in China bears scant resemblance to crises that have crippled the U.S. economy.
In China, all municipal debts ultimately are backstopped by a central government whose coffers contain roughly USD3.5 trillion. Meanwhile, policymakers have clamped down on speculation in the largest real estate markets by raising interest rates, placing restrictions on the ownership of multiple properties and tightening lending standards. Developers that overbuilt to cash in on the red-hot real estate market should learn their lesson after taking a financial hit.
Home sales in smaller cities — where more than half of China’s population lives — continue to increase in volume and price but remain constrained by income growth. Whereas so-called affordability products such as payment-option and no-money, no-income loans fueled the latter years of the U.S. housing boom, the majority of Chinese home buyers make a substantial down payment on their purchase.
China’s command economy has its drawbacks — for example, government-mandated tariffs on electricity sometimes fall short of input costs during periods of peak demand. But the central government has thus far done an admirable job steering the Chinese economy through these turbulent times.
Nevertheless, Chinese equities have turned in a disappointing performance this year, stung by concerns that Europe’s economic woes could sap exports and the EU sovereign debt crisis could erupt into a global credit crunch. Investors should focus on the China’s economic strength and take advantage of the correction to pick up names that stand to benefit from rising domestic demand.
Shares of China Mobile (CHL) have outperformed since the end of the second quarter, posting a total return of 3.3% over a period when the S&P 500 pulled back 8.9%.
Much of this relative strength stems from the defensive nature of the telecom industry, but shares of China’s preeminent wireless provider offer plenty of growth potential for investors with a longer time horizon.
China Mobile — which I first profiled two years ago in my Investing Daily article, Meet the New Mobile — has amassed a 68% share of the domestic market and continues to grow its subscriber base, particularly in rural areas where household incomes continue to increase and network availability has improved.
In the first half of 2011, the company added 32.7 million new subscribers — more than 50.5% of the Chinese wireless industry’s new sales — to bring its total customer base to 617 million accounts.
However, much of the company’s sales growth will come from increasing adoption of smartphones that feature data-intensive applications and generate more revenue per customer.
In the first half of 2011, China Mobile added 13 million users to its third-generation (3G) network. With 34 million 3G customers, the company controls roughly 43% of this lucrative market segment.
With RMB330 billion (about USD50 billion) in cash on its balance sheet and superior economies of scale, China Mobile represents a relatively low-risk bet on rising domestic demand in China for investors seeking growth and dividends in China.
By: Yiannis Mostrous