Don't Catch the China Envy Syndrome

11/24/2010 3:34 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Not sure if you've heard, but we're all one day soon going to be working for the Chinese. For the unemployed, that might make a welcome change.
And it's actually happening in places like Saginaw, Mich., where workers at a former General Motors (NYSE: GM) subsidiary now ultimately report to bosses in Beijing.

But decent wages and increased United Way donations is not the sort of Chinese capitalism that Citizens Against Government Waste has in mind in its oft-played scare ad. For them, working for China represents a US downfall, the end of the imperial road.

Leave aside the racist subtext. Ignore the blame that the Chinese lecturer in the ad heaps on US stimulus spending—this after China flooded the zone with a much bigger stimulus, relative to the size of its economy, via increased government spending and bank lending.

What we're left with is a handy distillation of the American paranoia about losing our top-dog status.

Don’t Pack Your Suitcases

It's a rerun of the panic over the Japanese menace from the 1980s, only worse. Worse because we are in fact less powerful than we used to be. Worse because our living standards have eroded noticeably over the last decade. Worse because this isn't 127 million Japanese eyeing our golf courses. This is 1.3 billion Chinese, many of them still subsistence peasants. Having taken so many of the easily exportable US jobs, they're coming next for “our” corn and gasoline, our already-eroded standard of living.

For an upmarket version of Chinese triumphalism, check out “In China's Orbit” in the Wall Street Journal, a Harvard professor's lengthy paean to Beijing's growing power. The same paper ran another telling story the same day, this one about 15 million foreigners applying for 50,000 visas to move to the US at stake in the annual green card lottery. That's 300 applicants for every ticket to paradise we grudgingly allocate. It's inconceivable that even 15,000 immigrants would willingly move to China except from North Korea or another blighted land.

China is a pollution-chocked Mordor cranking out skyscrapers and airliners and much of what Wal-Mart (NYSE: WMT) hasn't outsourced to Vietnam just yet. Income per capita is around $250 a month, and nearly 30% of the disposable income goes to food, versus 6% in the US.

As People's Bank of China Governor Zhou Xiaochuan told the assembled International Monetary Fund worthies last month,
“China's gross domestic product per capita is only US$3,743, ranking it below the world's top 100; gaps between the urban and rural areas and between regions in China continue to expand; with a labor force of nearly 800 million, China is faced with enormous employment pressure; China's resources per capita are low, and arable land and fresh water per capita are only approximately 40% and one-third of world average levels, respectively, constraining further development."

A Cheaper Dollar Is a Speed Bump

The truth, though, is that by the time the mortgage and car payments are made, the average jobless American may not have much disposable income either. Which is why Ben Bernanke's speech in Frankfurt last week made clear that countries maintaining artificially low exchange rates can't complain if the Federal Reserve tries to limit the collateral damage their policies are causing.

The Federal Reserve's bond purchases will hit China with increases in the dollar prices of the commodities it ravenously imports—unless of course it revalues the yuan to make the commodities cheaper. In contrast, the US will get to export more copper and corn, lowering the current account deficit that's squeezing the economy like a lead blanket.

Only the policy maker who recently called the Fed “clueless” hasn't seemed to grasp that Germany's export surplus relies unavoidably on fiscal and investment deficits elsewhere. Rather, German Finance Minister Wolfgang Schaeuble believes his policies have been vindicated, as if trade surpluses rained from heaven. And so the belt-tightening must go on: Even in Germany, "we're not swimming in money but rather drowning in debt,” Schaueble said.

This is why the credit contagion currently spreading through Europe's bond markets could prove to be an extraordinarily positive development, if it ultimately forces the heavily indebted states to drop the euro. Spain, Portugal, Ireland and Greece would have new hope for growth and, possibly, a fighting chance to undercut all those extra-virtuous German exporters. At the very least, domestic production would ramp up as imports grew expensive. This is also how a cheaper dollar could slow the drain of skilled US jobs (the ship on unskilled ones sailed long ago.)

Though they're certainly painful, US problems pale in comparison with China's, or with South Korea's challenge of coping with periodic attacks from the north. Seoul's stock market refused to bow to the latest provocation. If only we could import such reserve.

Another Outlook, and Two Ways to Play

David Fuller and Eoin Treacy argue that other emerging markets are similarly unlikely to roll over. Interest-rate hikes in China and other fast-growing economies will not bite as long as they're merely catching up to inflation, they note.

With so many emerging Asian currencies destined to rise, investments that throw off a rich yield even at the current exchange rate may prove especially valuable. Carla Pasternak notes that the leading Thai wireless carrier is already paying a winsome 6.5%, not counting a special payment that bumped the yield past 11%.
Andrew McHattie highlights a discounted London-traded fund with a long and successful record of investing in medium-sized European companies, which are themselves appealingly cheap thanks to the efforts of Herr Schaeuble. Danke!

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