Is This the Beginning of the End for China...
or Just the End of a Great Beginning?
Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst and editor of Market Shock Trader.
Dear A-Letter Reader,
In Friday's wealth comment (The Global Market That's Moved from "First to Worst"), I explained why China, recently one of investors' favorite markets, has sunk to the bottom of the list. In fact, according to a recent Citigroup report, China has become the most "underweight" market in Asia for the first time ever.
So how did the most popular and best-performing market over the past few years go from being first-to-worst so quickly? Well, Chinese shares have declined 30% from last year's high. That has a lot to do with it.
After more than doubling in value in each of the last two years, the Shanghai Composite Index of mainland Chinese stocks tumbled sharply since peaking last October. The index lost about one-third of its value.
Hong Kong shares - which is my favorite way to play China - are down about 20% in sympathy with the mainland's decline.
So is this the end of the beginning for China's global dominance? Or is it the beginning of the end for China? Is it time to jump ship and forget about China for awhile - or is this another great buying opportunity?
Judging from the speed with which many China bulls have so swiftly turned bearish, I have to say that this contrary "sentiment" indicator is lined up squarely in China's favor. In fact, data on mutual fund flows show heavy selling of China region funds. Retail investors may be running for the exits in China at exactly the WRONG time.
China: the New Engine of Growth...
and Investment Wealth
I believe investors are missing something amid the confusion of this global credit-crunch selling panic. They're missing the fact that China is a great long-term investment opportunity that's just beginning. The world's fastest growing economy is now the second-largest in the world on a purchasing power parity basis. There are dynamic changes taking place in China, and gigantic opportunities to profit from it.
Last year, for the first time in history, China and other emerging markets contributed more than half of the world's total economic expansion. China alone accounted for 35% of global growth last year, while the vaunted U.S. economy kicked in just 7%!
China's retail sales grew 13% in January - in spite of the worst winter weather in a half-century. In the U.S., retail sales were up just 0.6% in early January. In America (and Europe), the ongoing credit crunch has triggered a steep decline in lending. Both consumers and businesses are finding it difficult to access credit. Meanwhile, in China, bank lending to consumers and small businesses surged 22% last month!
What we are witnessing here is a "radical realignment in the global economy," in the words of George Soros. China, India and other nations in the emerging world are enjoying a strong counter-trend to the upside - while the U.S. and other developed markets are declining. This dynamic applies not only to the economies of markets like China, but also to investment opportunities there as well.
Bull in China Sees Buying Opportunities Coming Soon
Globe-trotting investor Jim Rogers (Soros' partner in the wildly successful Quantum hedge fund) correctly predicted the beginning of a mega-bull-market in commodities near the end of the last century.
At the time, foolish retail investors were chasing dot-com stocks to an irrational "bubble" peak. Rogers correctly spotted that tech bubble and steered clear of Internet stocks. Instead, he plowed his money into commodities that were dirt-cheap in 1999 and 2000.
Of course Rogers was right on the money then, and retail investors were dead-wrong.
Now, he is also very bullish on China. So what does he think of the recent steep correction in Chinese share prices?
"I'm delighted to see what's happening in Shanghai and Hong Kong," he said, referencing the sharp correction in share prices during a recent Fortune magazine interview. Rogers went on to explain that "if things hadn't cooled off, the Chinese market was in danger of turning into a bubble."
Far from seeing a "bubble" in China that's now in the process of popping, Rogers clearly sees the recent bear market decline as healthy. It's allowing some of the steam to escape from China's overheating economy, and reducing excess investment speculation.
In other words, he sees a healthy correction that should soon lead to great upside profit potential in China.
Thinking About Buying in China, But NOT in America
The real question is: Can the Beijing authorities successfully engineer what has been so elusive for the U.S. Federal Reserve - an economic "soft landing" - or will China inevitably face a crash landing?
While that debate continues to rage, Jim Rogers seems unfazed. In fact, he's looking forward to his next big opportunity to buy into China on the cheap.
"I would suspect the correction isn't quite over in China. But I'm gearing up," to buy shares says Rogers. "I'm starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I'm starting to think about buying new shares in China for the first time in a while. And I'm not thinking about buying in America."
Note to China bears everywhere: Jim Rogers' bullish bets on China - not to mention his exceptional track record over three-plus decades of investment - is a very good reason to take a good, hard second look at investing in China.
Rogers sees buying opportunities in this dynamic emerging market, while others are scared off and selling out. Historically, that's been a great signal to follow! To paraphrase Warren Buffett: Rogers is attempting to be "greedy" while retail investors are "fearful." I know which side of that trade I'm taking.
MIKE BURNICK, Senior Editor & Global Markets Analyst
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