I love posting articles by the guys at +Money Morning Australia and +Daily Reckoning Australia due to the fact that you get unbiased views about where the markets are moving and mixed opinions in-house as you will see from the article below by +Alex Cowie. His view contradicts posts of another great contributor, +Greg Canavan. I believe this makes the content from these publishers very relevant and one should try to understand the different points of view and learn from them all, allowing one self to make more calculated decisions with regards to your financial decisions in this global economy.
China Bull vs China Bear - There can only be one winner
No punches have been thrown in the office…yet.
It might not be long though. This China bull is
taking on the office’s most devout China bear, Greg Canavan, in a war of words that’s on the
verge of getting out of hand.
One of our colleagues suggested we dress up in bull and bear outfits, and just have it out on the streets here in St Kilda. He helped support his idea with some photo-shopped pictures of yours truly and Greg:
Source: Ninjali Design
What do you reckon?
Funny thing is, fighting in fluffy animal costumes in the
streets of St Kilda actually wouldn’t raise many eyebrows. In fact, we’d
probably make some money from hipster passers-by for our ‘street performance’.
But looking past the cute pictures, I want to emphasise that
there’s a serious message here.
This starkly divided opinion in this usually united office
is symptomatic of something – China’s economy is at a critical crossroads.
This is of paramount importance because which way China
turns makes now either time to sell resource stocks and run for the hills
as Greg instructs; or as I believe, it makes right now the best time in
more than five years to buy resource stocks…
China bears are a bit overconfident right now, after having
loads of mud to sling at us for the last two years.
You see, since the start of 2011, China’s growth decelerated
steadily from 9.8% down to 7.4%.
‘Crashing Chinese growth’ has been the China bears battle
cry!
Trouble is that neatly overlooks the fact that 7.4% is still
a nitrous-oxide type growth rate!
To put 7.4% in context, it doubles an economy’s size inside
of a decade. It’s fast. It also makes China’s growth by far the fastest growth
rate in any large country globally. You have to start looking at tiddlers like
Thailand (twenty times smaller than China) to find faster growth.
But it was the deceleration of growth that has the bears fired
up. Would it continue and take China down in flames?
Short answer: no.
Bullish on China: Here’s Why
Over the last few months of 2012 (as far as I could see) it
was obvious China was building for a solid bounce in economic growth. It was
time to get bullish on industrial commodity stocks again. That’s why I started
2013 with a copper producer for Diggers and Drillers readers.
Sure enough, when China released its GDP data a week later,
it showed a meaningful jump from 7.4% to 7.9% growth.
China’s Growth on the Way Back Up Again – Copper, Iron Ore
and Coal to Boom
Of course, one stubby does not a slab make. We need a few
more quarters to confirm this trend. But by then, the trading opportunity will
be gone, so where do we look?
The ‘Purchasing Managers Indices (PMI)’ are one place.
Between the official and HSBC versions of this index, they
survey 1250 ‘purchasing managers’ in the Chinese manufacturing sector.
Businesses react to the market rapidly, and the purchasing manager has the best
view and feel of the economic conditions.
It’s a ‘leading indicator’ of the economy. As such, it’s
usually a pretty reliable guide of what the GDP will be for the quarter. And
right now the PMI’s have been in positive territory for their last four monthly
releases.
Of course, the only problem with trading on an official PMI,
or GDP figure, is that they are government statistics. And as they say, there
are lies, damn lies, and government statistics. Thing is there’s also an even
worse category, called Chinese government statistics. So we watch them, but
take them with a pinch of salt or three.
But if Greg pinned me down to give him one reason why I was
so bullish on China at this moment, it actually wouldn't be the statistics.
The reason would be that in November 2012 China wrapped
up the main parts of its once-in-a-decade leadership transition.
In short, this will be one of the major drivers of the commodity
markets in 2013.
In my eyes, it’s an investing opportunity that you
can either grab now, or kick yourself for at Christmas for missing the trade of
the year.
The reason I say this is that, like clockwork, this
leadership transition has unleashed a wave of infrastructure spending.
This chart shows how this has jumped EVERY time in the last thirty years. The
years after 1982, 1992, and 2002 ALL saw a huge move without fail.
Buckle Up for Huge Chinese Spending
Source: FT
The reason being that Chinese politicians have their hands
tied until the transition passes, so once it’s in the bag, they play catch up on
projects. Besides, they are smack in the middle of an ambitious five-year plan
of spending targets and they need to pick up the pace to get there.
So I expected a dam-burst of infrastructure spending to be
unleashed in early 2013. And that would drive commodity demand as project
development growth moves up the gears again.
We had a clear signal of this in China’s credit
figures for January.
After treading water for most of last year waiting for the
leadership transition, the flood gates of lending have opened.
The ‘total social financing aggregate’, which is China’s
most comprehensive measure of lending, has jumped from around one trillion Yuan
a month, to 2.5 trillion a month.
China’s Lending Explodes: Total Social Financing Aggregate
Soars to 2.5 trillion
Source: Bloomberg
Now China bears will probably be tearing their hair out at
this point. Their beef is that this is a clear warning sign of a credit bubble.
This is the core of where the bulls and bears differ. Where
the bears see this lending as a reason to run and take cover, I see it as a
precursor to immense Chinese growth.
To me, the crux of this chart is that this lending will
translate straight into demand for the raw ingredients of an economy: iron ore,
copper, coking coal, and the
scores of more obscure raw ingredients like manganese, tin or rhodium. Not to
mention indirectly to demand for gold – one of the things Greg and I can agree on.
Some Words of Wisdom
But what about the idea that I'm overlooking the fact that
half of China’s GDP figure is from lending what could become bad loans that
will cripple the banking sector?
There’s no denying China has taken investment spending to
nosebleed levels, and that it will need to unleash the value for the bets to
pay off. But I'm more optimistic than the China bears on this happening, and
thus preventing non performing loans from rocking the system.
And I’m also more optimistic on China’s ability to stretch
and rewrite the rules to enable payment, and to use the raw power of
urbanisation and also rising land prices to pay off debts. But that’s a story
for tomorrow’s Money Morning.
In the meantime, don’t forget to check out our free Google
plus pages. We've already served up a few exchanges on the bull and
bear China debate. Check
it out.
And even if I'm wrong on all counts, you can be very
comfortable that even if a credit bubble bursts – China will pull rabbit after
rabbit out of the hat to delay it.
I'm not denying that the China bears could even get it right
in the end. We'll see. In the meantime, investors have any number of years in
which to make money from the resource sector as this young resource
rally builds steam again after its two-year sell off.
A hugely successful retired fund manager summed it up for me
recently by saying, ‘Any punter on the street can always tell you twenty
reasons to avoid the market – the trick is to spot the opportunities amongst
the chaos, and then nimbly monetise them while the bears tie themselves up with
thoughts of impending doom.’
Enough said.
Dr Alex Cowie
Editor, Diggers & Drillers
Editor, Diggers & Drillers
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