Stratfor reported some statistics for China that should be disturbing.

China’s National Bureau of Statistics released on Feb. 2 details about economic growth for 2009, including the components of the year’s 8.7 percent growth rate. Growth is broken down into investment, consumption and net exports. Of these categories, investment contributed 8 percentage points, or 92 percent, of overall growth.

Meanwhile, consumption contributed a comparatively measly 4.6%, while net actually exports subtracted 3.9%. So,virtually all of China’s growth is based on stimulus / investment.  Without this capital spending splurge, China’s growth rate would have been a paltry 0.7%.

Given this, it would hardly seem that China would be the engine to pull the world economy out of the doldrums.   This is a development we intend to keep an eye on in the months ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Five hundred years ago, China was the most powerful country in the world, hands down.

“The Ming Empire ruled a people more numerous than the ancient roman empire at its height, larger in territory than modern Russia, vastly more powerful and richer than all the petty fiefdoms of contemporary Christian Europe put together,” writes Wayne Hale, NASA’s Deputy Associate Administrator for Strategic Partnership, in his NASA blog.

The Chinese also had the largest navy in the world — with ships that rivaled the size of WWII aircraft carriers — and used that navy to explore much of the globe (British writer Gavin Menzies contends in his controversial book 1421 that these Chinese explorers actually circumnavigated the world, discovered Antarctica, and even colonized parts of the Caribbean.)

So…what happened?  Why aren’t we all speaking Chinese today?

The outward-looking emperor who funded China’s age of exploration died, and a new emperor came to the throne–an emperor with a very different set of priorities and a different set of advisors.  As Hale continues,

These voices counseled the young emperor to turn inward. Surely China had enough problems to solve in China, why waste time and energy exploring?…  They advised that China should protect what they had from the foreigners.  Foreigners who wanted what the Chinese had.  The emperor followed this advice. He completed the great wall to keep foreigners out. He built a new capital, a forbidden city to keep the citizens of his own country out.

The emperor ordered that the fleet be burned.  The sailors were disbanded. It became a capital offense to build a sailing ship with more than two masts.  The emperor even ordered that all the records of all the voyages be burned.  China turned inward.

Why do we repeat any of this?  Because we see shades of the same mentality in the dispute between China and Google over censorship and cyber attacks.  Chinese censorship has been dubbed the “Great Firewall of China,” and its intent is the same as the original Great Wall–to keep the foreigners out.

It’s hard to know in advance what the tipping point, what the proverbial straw that breaks the camel’s back, would be that would cause China to economically regress or that would cause foreign investors to lose faith in the “Chinese miracle.”   But we would not at all be surprised if future historians point to this event as just such a tipping point.  Only time will tell.

Meanwhile, the Chinese property and capital spending bubble continues to build…

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We saw an article yesterday that gives us hope for the future as we reach these last few days of 2009.   The New York Times wrote,

When the clock strikes midnight on New Year’s Eve, China and 10 Southeast Asian nations will usher in the world’s third-largest free trade area….  Trade between China and the 10 states that make up the Association of Southeast Asian Nations has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more.

The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

Being the hand-wringing, left-leaning New York Times, they of course titled the article “In Southeast Asia, Unease Over Free Trade Zone.”  Leave it to the NYT to fixate on the anti-trade grumbling of a small number of people and completely miss the larger story:  that after the biggest financial crisis since the Great Depression, free trade isn’t dead!

We’ve seen a surge of anti-free-trade sentiment pop up in the U.S.and Europe (remember the shameless “Buy American” provisions?), but luckily the actual damage has been fairly small.  Still, while we free traders in the West are fighting a rear guard action to simply hold on to what we have, in Asia they are boldly moving forward.  Good for them.

Increased intra-Asian trade should help to gradually wean the region off of its reliance on exports to the West.  It should help to facilitate the continued rise of the middle-class Asian consumer.  This is good for Asia and good for the world.

We are not “sinophiles” here at HS Dent.  Unlike some other commentators, most notably Jim Rogers, we do not believe that the coming decades will see China emerge as the new world economic leader.  The country simply has too many serious demographic issues with which to contend.   But, we do believe that a healthy China and a healthy ASEAN is beneficial to ourselves and to the world economy more broadly.  So, here’s to the success of the Asian free-trade zone in 2010 and beyond.  Cheers!

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

One of our Demographics School attendees forwarded us two articles we thought we’d pass on:

“The American Who Manages the Decline of a Japanese Hamlet“  Wall Street Journal

“In Aging China, A Change of Course” Washington Post

It’s a week before Christmas, and we can’t help making a comparison here to Charles Dickens’s A Christmas Carol.  In this case, China is Scrooge and Japan is the Ghost of Christmas Yet to Come.

The difference is, unlike Ebenezer Scrooge — who had the ability to change his ways and avoid his unfortunate fate –China’s future cannot be changed.

In comparing China to Scrooge, we are not referring to Chinese labor practices or implying that China’s labor force consists of millions of unfortunate and underpaid Bob Cratchits.   It’s not China’s wages that we consider misery, but rather its birthrate.

Demographics are the future that has already been written, and China’s future looks bleak indeed. But first,let’s look at Japan.  The Wall Street Journal article above tells the story of an American whose job it is to manage the slow death of a small Japanese village.  While one village might not be particularly significant in the grand scheme of things, the same is occurring throughout Japan.  The island, with the exception of a small number of large cities, is slowly being depopulated.  Falling birthrates throughout the post-WWII era have insured that Japan will continue to shrink for the foreseeable, with serious consequences for the stability of the country.

China isn’t to this stage yet.  But after 30 years of the One Child Policy, it is only a matter of time before the day comes.  Even if China were to suddenly reverse the policy — which is unlikely — the damage has already been done.  And, as the Washington Post article recounts, Chinese families have become accustomed to the One Child Policy.  Many simply cannot afford to have a second child even if they wanted one.

So again, unlike Ebenezer Scrooge, it is almost certainly too late for China to change its ways.

Related post: “Some Geopolitical Musings”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

With the world economy “reflating,” the price of oil and other commodities has surged.  This is consistent with HS Dent’s forecast for “one last hurrah” in commodities in mid-to-late 2009.  We believe, however, that the long-term picture for oil and commodities in general is quite bearish.

Consider Kopin Tan’s comments in this week’s Barron’s:

“…the slump actually has masked the beginning of a profound, long-term  shift that will affect oil and oil stocks for years.  Thanks to a confluence of factors–a legislative push to wean the nation off foreign oil, and end to very cheap fuel, a global rush toward fuel-efficient cars, fewer people driving to work and more citizens becoming concerned about the environment — U.S. gasoline consumption might never surpass the high of the summer of 2007.”

So, in reply to the “peak oil” supply arguments from many commodity bulls (and doomsday / conspiracy theorists), Mr. Tan has suggested we may instead be looking at peak oil demand.  

Mr. Tan may be a bit too optimistic about Americans growing to love compact cars; this remains to be seen.  But we do think that he is correct about U.S. demand for energy being somewhat muted in the years to come.

Meanwhile, we read in the Financial Times this morning that India, after its recent discovery, will now be supplying much more of its own crude oil and will depend less on imports.   We should also remember that Brazil made one of the largest discoveries in decades off its Atlantic coast, and this supply will be hitting the market in the next few years.

But what about China?  Won’t Chinese demand cause the price of oil to skyrocket again?  Maybe.  But we doubt it will be sustainable.  Investors are getting increasingly worried that China is on the verge of “blowing up.”  Yes, it is a country of 1.2 billion people.  But even a country of that size can have too much infrastructure.  Is China at that point yet?  Who knows.  Chinese government statistics are notoriously unreliable.  But at some point in the next few years, we believe the investment-fueled Chinese boom will go bust — knocking out a major source of oil demand.

Bottom line:  Look for a secular bear market in commodities, not bull.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

When times get hard, it appears that free trade commitments are the first thing to get sacrificed on the altar of populism.  There are a number of reasons for this.  Firstly, in all forms of government (but perhaps most obviously in a democracy), a politician’s primary objective is staying in power.  And when your constituents want something, you feel obligated to deliver the goods, even if you know it’s a bad decision.  It’s easier to ride the wave of public sentiment, no matter how destructive it is, than to make the “right” decision.  

Politicians also have short time horizons; alas, they get to enjoy immediate political points for popular  policies but they are often not around to see the end result of those policies, which are often disastrous.   And, to be sure, let us never forget that many politicians, their scheming aside, are really quite stupid.  Many do not even comprehend the damage they cause. Read the rest of this entry »

Yesterday, Dennis Gartman wrote a few words we’d like to repeat. (Yes, we know we quote him a lot in this blog, but the man does good work). Gartman said,

“Long time readers of [the Gartman Letter] know that we believe demographics drive everything. Demographic trends…trump taxation; they trump economics; they trump politics on the Left and on the Right. Simply put, demographics are triumphant, and yet few pay any heed to these tidal circumstances that colour all things else”

Read the rest of this entry »

In a prior post on India, we wrote, “India—which never enjoyed the export-fueled growth of her emerging market contemporaries—continues to plod along.  While there has been much to criticize about India’s economic policies in the past (and today too, for that matter),Indiamay well emerge from this long-term recession as the new economic leader ofAsia.”   A few days later, we wrote in a follow-up, “Unfortunately, the “good” countries who followed the economic rules have gotten punished…hard.  Meanwhile, the “bad” countries, who broke all the economic rules have survived relatively unscathed.”  Today, we see more evidence that India’s “bad” behavior has been rewarded.  The country’s rather dirigiste economy, in which the dead hand of government is quite a bit heavier than in most countries, continues to hold up relatively well.  Read the rest of this entry »

A lot of ink was spilt in the past few years about the glories of globalization and free trade.  We are big believers in the virtues of free trade, and we were happy to see world policymakers move this direction (even if it was in direct opposition to public opinion).

The problem is that in an integrated world economy, the trade partners that grow rich together also go broke together.  We wrote about this at length in the May 2007 issue of the HS Dent Forecast.(“Going Down With The Ship”), and more recently in the pages of this blog. 

Read the rest of this entry »

Warren Buffet must be happy.  Coca-Cola, the crown jewel of his Berkshire Hathaway stock portfolio, reported healthy sales and revenues in the fourth quarter.  Given the absolute evaporation of  demand plaguing the rest of the consumer goods and services sector, this is quite an accomplishment.  The Financial Times reported:

“Coca-Cola sales sparkle despite the downturn”