China First to Recover from Recession?

By William Fleckenstein  DEC 03, 2008 10:00 AM

Despite problems, Chinese market still performing better than almost any other.


I just returned from China, and I must say I was very impressed by everything I saw there. Admittedly, my sample set was small. I only visited 3 cities: Beijing, Shanghai and Hangzhou; those aren't representative of the entire country. Nevertheless, I was fortunate enough to meet with some people who really know a lot about how the country functions.

I think the most important thing for folks to understand is that China hasn't suffered the epic credit binge that much of the rest of the world has. The savings rate is high in China. Mortgage products require sensible down payments. Credit is something that hasn't quite come to China yet (although I understand credit cards have recently become more available, especially in the big cities). People pay cash for most things, though they do use debit cards.

From a credit standpoint, it seems similar to how life in America used to be when Leave It to Beaver ruled the airways. Meanwhile, the people whom I met were very industrious, and their enthusiasm seemed quite high. (As a traveler, I was happy to discover that the airports were new, and the bags arrived quickly.)

The biggest problem China faces is its dependence on exports. A large subset of the export issue is the fact that China has roughly 150 million itinerant/migrant workers -- yes, you read that number right -- in the south, who've moved there from the west. (Away from the big cities, life is very difficult and people are very poor.)

But China understands its problem, and is working overtime to stimulate the domestic economy. And there's a lot they can do. More importantly, they have the reserves with which to do so, having accumulated a couple trillion dollars nationally.

Thus China isn't without its problems. (I have left out many, and don't mean to gloss over them.) But relative to the problems faced by most countries, China's seem at least to be manageable, and don't stem from having borrowed and spent their heads off.

The other thing to note is that the "capitalistic" progress they've made is really only 15 or 20 years old. So,it is very early in the "China miracle," if you will. And, as I mentioned earlier, even though the cities are modern and their infrastructure is very new, much of what I saw from a socioeconomic standpoint leads me to conclude that China is more like America was in the 50s and 60s. I therefore reached the following completely obvious conclusion: China is the wave of the future.

I intend to do plenty of research in the coming months, because there's an awful lot to learn if one wants to be an investor there - not least of which is to decide which exchange (and shares) to use: Singapore, Hong Kong, Shanghai and/or Shenzen. One also needs to be aware that there is a serious old-boy network in China, related to its bureaucratic communist party structure - though it seems to me that they are communist in name only, and capitalists at heart.

For anyone who'd like to learn more, I recommend a book called Mr. China by Tim Clissold. (After being introduced by a friend, I was lucky enough to spend a couple hours talking with him.) The book will give folks an understanding of how difficult it has been in the past to do business in China. Given the recent decline in stock prices, the indices are not all that far from where they were in the mid- to late 90s, when everyone thought that China had so much promise - before so many folks got burned.

However, I think a lot of those problems have been dealt with, especially the failed joint ventures and the related bad assets in the banking system. In sum, I believe that China will probably be the first country to recover from the worldwide recession.

Finally, it's worth noting that China's stock market has performed so much better recently than virtually any other market, with Monday's performance a good example. Stay tuned.
No positions in stocks mentioned.

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