The China bulls and bears have been going at it lately.
The bears argue that the country is creating a nasty bubble, especially in its infrastructure and real estate markets. Famous short seller Jim Chanos has even called China’s real estate market “Dubai times 1,000… or worse.”
Of course, the bulls staunchly decry that statement. But when people like Jim Chanos speak, investors should take a second look at their positions. Could the bulls be wrong and the bears be right?
Investors need to look into the matter further before they can safely invest in China.
The Investing Community’s Bubble Fears
The trading community has a few good reasons to dislike China…
For one, the Chinese economy used to depend on investments for 25% of its GDP. But that number is fast climbing towards 50%, fueling fears of overcapacity.
However, the investment-to-GDP ratio is similar to Japan’s several decades ago. The smaller Asian country invested heavily in the same areas during the 1960s. And that strategy worked out just fine for it at the time, regardless of what happened later on.
But even faced with those facts, many bears still side with Mr. Chanos. They think that too much money infused into any market so quickly creates real estate and other kinds of bubbles.
They’re quick to point out examples too, like the newly built town of Chenggong. Practically empty right now, it lies close to the large city of Kunming in the Southwest.
Yet while critics jump on it as proof of a bubble, they should look a bit closer before they leap, specifically at Kunming’s vastly overcrowded conditions. Since Chenggong provides a close commute with more breathing room, it will attract families and businesses alike. In fact, the local government already has plans to move many offices there over the summer.
It also hopes to reduce Kunming’s traffic issues by building 15 new bridges and a light-rail network connecting Chenggong to the city center. And China has plans to build a high-speed rail line spanning the 1,250 miles between Kunming and Shanghai. That will bind the once isolated area even closer with the national economy.
Those types of projects simply mark China’s new focus on previously underdeveloped regions. It already devoted significant time and resources to the eastern coastal areas… Now, it’s the southern and western sections of the country’s turn.
The bears worry that regardless of the reasoning, the flood of lending from China’s local governments especially could turn into bad debt very easily. Northwestern University’s Victor Shih believes they have debts of around $1.67 trillion… more than double the official estimate, and equivalent to a third of GDP.
Fortunately, that lending should pay off though.
The Reasons Behind China’s Investment Boom
China intends its investment boom to push exports more heavily on its up-and-coming southeastern Asian neighbors instead of the floundering U.S. It believes that improving those links could potentially double its trade with them.
With that in mind, it already finished one bridge linking Kunming to Bangkok, Thailand. And it has almost completed another between Kunming and northern Vietnam.
Of course, the Chinese government also has a few other reasons for investing so heavily. Already in the process of creating an airport for Kunming, it wants to turn the city into a tourist hot spot.
And on a larger scale, the nation is trying to cope with the results of its one-child policy. As the working population declines, analysts see savings dropping as soon as 2015. When that happens, its graying society won’t be able to produce the finances needed for such bold projects. So China wants to get as much done as possible in the next five years.
Two Picks for China
In the end, Jim Chanos can read into China what he likes. But he seems to be interpreting the story incorrectly, just like so many before him have.
Over the last decade, investment gurus have raised the alarm about the same issues. Yet back then – as now – the Chinese economy continued to steam along. Returns on capital remained stable and corporate profits increased.
Bearish investors lost out on the opportunity to make significant money over the last 10-15 years. And they’ll continue losing out for the next decade or so if they keep ignoring that high rates of economic growth can solve overcapacity and overinvestment issues. In addition, with $2.4 trillion in foreign exchange reserves, China can easily recapitalize its banks if necessary.
It has before. Successfully.
Investors who want to take advantage of the bullish view can look into two solid exchange-traded funds.
The new Emerging Global Shares China Infrastructure Index Fund (NYSE: CHXX) consists of 30 Chinese companies that work in the sector. And the Claymore/Alpha Shares China Real Estate ETF (NYSE: TAO) tracks over 40 companies in both the Hong Kong and Chinese real estate sectors.
Down nearly 20% from its peak, you’d better believe it’s a steal.
Good investing,
Tony Daltorio
http://www.investmentu.com
The bears argue that the country is creating a nasty bubble, especially in its infrastructure and real estate markets. Famous short seller Jim Chanos has even called China’s real estate market “Dubai times 1,000… or worse.”
Of course, the bulls staunchly decry that statement. But when people like Jim Chanos speak, investors should take a second look at their positions. Could the bulls be wrong and the bears be right?
Investors need to look into the matter further before they can safely invest in China.
The Investing Community’s Bubble Fears
The trading community has a few good reasons to dislike China…
For one, the Chinese economy used to depend on investments for 25% of its GDP. But that number is fast climbing towards 50%, fueling fears of overcapacity.
However, the investment-to-GDP ratio is similar to Japan’s several decades ago. The smaller Asian country invested heavily in the same areas during the 1960s. And that strategy worked out just fine for it at the time, regardless of what happened later on.
But even faced with those facts, many bears still side with Mr. Chanos. They think that too much money infused into any market so quickly creates real estate and other kinds of bubbles.
They’re quick to point out examples too, like the newly built town of Chenggong. Practically empty right now, it lies close to the large city of Kunming in the Southwest.
Yet while critics jump on it as proof of a bubble, they should look a bit closer before they leap, specifically at Kunming’s vastly overcrowded conditions. Since Chenggong provides a close commute with more breathing room, it will attract families and businesses alike. In fact, the local government already has plans to move many offices there over the summer.
It also hopes to reduce Kunming’s traffic issues by building 15 new bridges and a light-rail network connecting Chenggong to the city center. And China has plans to build a high-speed rail line spanning the 1,250 miles between Kunming and Shanghai. That will bind the once isolated area even closer with the national economy.
Those types of projects simply mark China’s new focus on previously underdeveloped regions. It already devoted significant time and resources to the eastern coastal areas… Now, it’s the southern and western sections of the country’s turn.
The bears worry that regardless of the reasoning, the flood of lending from China’s local governments especially could turn into bad debt very easily. Northwestern University’s Victor Shih believes they have debts of around $1.67 trillion… more than double the official estimate, and equivalent to a third of GDP.
Fortunately, that lending should pay off though.
The Reasons Behind China’s Investment Boom
China intends its investment boom to push exports more heavily on its up-and-coming southeastern Asian neighbors instead of the floundering U.S. It believes that improving those links could potentially double its trade with them.
With that in mind, it already finished one bridge linking Kunming to Bangkok, Thailand. And it has almost completed another between Kunming and northern Vietnam.
Of course, the Chinese government also has a few other reasons for investing so heavily. Already in the process of creating an airport for Kunming, it wants to turn the city into a tourist hot spot.
And on a larger scale, the nation is trying to cope with the results of its one-child policy. As the working population declines, analysts see savings dropping as soon as 2015. When that happens, its graying society won’t be able to produce the finances needed for such bold projects. So China wants to get as much done as possible in the next five years.
Two Picks for China
In the end, Jim Chanos can read into China what he likes. But he seems to be interpreting the story incorrectly, just like so many before him have.
Over the last decade, investment gurus have raised the alarm about the same issues. Yet back then – as now – the Chinese economy continued to steam along. Returns on capital remained stable and corporate profits increased.
Bearish investors lost out on the opportunity to make significant money over the last 10-15 years. And they’ll continue losing out for the next decade or so if they keep ignoring that high rates of economic growth can solve overcapacity and overinvestment issues. In addition, with $2.4 trillion in foreign exchange reserves, China can easily recapitalize its banks if necessary.
It has before. Successfully.
Investors who want to take advantage of the bullish view can look into two solid exchange-traded funds.
The new Emerging Global Shares China Infrastructure Index Fund (NYSE: CHXX) consists of 30 Chinese companies that work in the sector. And the Claymore/Alpha Shares China Real Estate ETF (NYSE: TAO) tracks over 40 companies in both the Hong Kong and Chinese real estate sectors.
Down nearly 20% from its peak, you’d better believe it’s a steal.
Good investing,
Tony Daltorio
http://www.investmentu.com
