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How Long Will China Need Us?

11/16/2011 3:00 pm EST


Neil George

Editor, Profitable Investing

China is making massive investments outside the US and Europe to separate its economy from ours, says Neil George. Incidentally, you can profit from some of those cash flows.

Neil, let’s talk about China and the US. Are they still the enemy? China, that is?

Well, Karen, to hear from our major political leaders in the US, China is the easy punching bag to blame for any woes or any concerns that we might have.

Again, it’s amplified by some of the major union leadership in the US. They always want to blame the Chinese. Or if you are looking at any sort of company that might be, really, domestically faced…they say, "We can just blame our weak earnings on the competition of China."

The reality is that even though China might be sort of that the easy punching bag, and has been constantly demonized. We have been regularly getting criticism from our current US Treasurer and our current Fed chief and our current President as being a communist nation with some of these fixed and controlled markets. The reality is that, China has been going in a more opposite way than that of the US.

When you are looking at the US, over the past several years, we have seen—in the particular the last three—we’ve seen this huge increase in the amount of federal government as a percentage of the overall economy. Typically, the average has been working out at about 18% or 19%, but we’ve surged to nearly 25%.

Now if you look at, again, the past few years, China has been going in the exact opposite direction. We have been seeing a rapid decrease in the amount of government participation, and a rapid increase in private participation.

Then, going further, what we also want to look at is private investment…the idea that in the US, private investment has continued to slow. It has been negative as far as capital investment as percentage of GDP. Yet in China, in just the past year alone, we’ve seen a surge of nearly 100% of growth in private investment.

Consumerism in the US? Again, the consumers have largely kind of gone by the wayside. Sort of still in a negative territory, you know, on an annualized basis. China, we are seeing a continued ramp up in consumerism, growing at double-digit rates. The companies that have been facilitating this have been doing quite well.

Really what this represents is, China is getting out of business of the government being first and allowing the private sector to succeed. It has seen a broadening of the middle class. It has been very eager to expand its education capabilities.

Again, the economy has done extremely well. Whereas it’s competitor, here in the US, has been going in the exact opposite direction.

What about their perceived manipulation of their currency?

Well, again, that’s another interesting way of looking at it. If you look at the broad history of countries that have gone from planned economy to a free-market economy—you know, every other country besides China has always taken the US lead on the IMF suggestion. You open up the currency markets, open the current account, let people come in.

The markets basically go into this huge balloon. The cash basically dries up the currency. Debt, basically, starts to ramp up in the government, in the private sector, and in the corporations. There is a reckoning, everything crashes, and you have a massive recession that lasts usually for a long period of time.

It has happened in every country. Even Brazil has gone through it, through their reckonings in the past during the 1990s. You’ve seen all of the old Soviet bloc countries have gone through these massive reckonings.

The one country that has, basically, ignored that advice has been China. A very steady advancement as far as making ongoing easements, as far as capital coming in. Allowing the currency to trade more freely, which is actually, the currency renminbi does trade on a free basis now. We’ve been seeing that steady improvement or increasing in value in renminbi.

It also, has allowed, you know, corporations to invoice and make transactions in renminbi across borders. We really have seen the stepping stone for the first managed transition from government to the private sector, from a closed to a free market, without going through the massive upheaval and a massive crash.

From my perspective, it perhaps might be, the US and the rest of the world should be looking at China as being sort of, you know, the better teacher to follow.

Any way an investor can take advantage of that?

Well, one thing that you’ll note is that the Chinese stock market has been perceived, to be, you know, sort of, very tied in with European and US markets; therefore, we’ve got a lot of gyrations. Even in companies that are doing quite well in their domestic market.

The key thing to look at is, from China’s perspective, the idea that the US is a big market, and the Europeans are a big market; but there are other parts of the world that are exporting, not just more, but twice as much, more than twice as much than what they sell to the US, such as just their neighbors in Southeast Asia.

There are other markets that they’ve been investing in, such as South America, Brazil, parts of the African continent have seen tremendous Chinese investments. They’re already positioning themselves so that they can tell the US we don’t need you anymore, and the Europeans, we don’t need you anymore.

The idea is looking at some other transporters and so forth. One company that has been part of this is Navios Maritime (NMM). It’s a shipping company, pays about 9%.

Another is a domestic utility that I have been owning for a while. It’s very broad-based growth pick: China Mobile (CHL), and it’s on the New York Stock Exchange.

Again, good accounting practices in both of these companies; very straightforward. You’ll find while they both might be a little volatile, both basically pay a reasonable amount of dividend.

Again, both are capitalizing on the growth of shipping and expansion, as well as domestic consumption growth we’ve seen in China.

And a longer term play.

And a longer term play.

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