Market Direction and Stock Trends

[DiscoverGold]

Chinese Growth Spurt
By: John Mauldin | September 14, 2018

Economic reality isn’t black and white. At any given time, both good things and bad things are happening. Ignoring one side because it doesn’t fit your preferred outlook is an excellent way to go badly wrong.

So it is with China. We hear a lot about that vast country’s problems and challenges. They are very real and could have major consequences... which we will explore soon… but there’s good news, too. We reviewed some of it last week in China’s Command Innovation. Today, we’ll add a few more positive data points.

This letter will be a little different than most. Below you’ll read several short vignettes about positive events in China. They aren’t necessarily related and won’t build to any particular conclusion. My goal is simply to demonstrate that China has good news, and even some fabulously great news, much of it quite compelling. Whether it is enough to overcome the challenges is a different question we will address next time. And frankly, the manner in which they are growing clearly makes Western countries uncomfortable, as it is not our usual playground.

First, a quick aside. We have been making an aggressive effort to keep the main body of this letter around 3,000 words, a length most people can read in a few minutes. We’ve had good feedback on it, too. Then in my personal section, I share a great story from Art Cashin from last Monday night. So you can read either part of this letter, or both, as you wish.

Now on with our China story.

Getting a Grip on Growth
Here in the US we are very excited at the prospect of seeing 3% real GDP growth this year. In China, that would represent an unprecedented crash. Here are the annual changes from 2010-2017, with IMF forecasts for 2018-2022.


Source: Statista

Now, you can fairly ask how reliable this data is. The numbers have a curious way of coming in at exactly the level Beijing expects. But I have no doubt that Chinese growth is far greater than the US or any other developed country has seen in the last decade. And I think the IMF is probably right that it will decline only gradually and remain impressive, by Western standards, well into the 2020s. Much, if not most, of this growth is debt driven, and eventually that debt has to come home to roost. But that doesn’t seem to bother them currently.

Yet I constantly hear predictions that China’s growth days are over. Often, this stems from a belief that China’s capital investment has been higher than it actually is, leaving excess capacity. And in some industries that is true—like steel production—but steel factories have been shutting down left and right. Axios reported recently:

By the end of the year, some 1.8 million Chinese coal and steel workers will lose their jobs, victims of the government's shift to cleaner industries and a shutdown of small enterprises. To put that in perspective, the two industries employ just 192,000 workers in the US.

That is in addition to the millions of coal and steel workers who have already lost their jobs in the last 15 years. The Chinese are ruthlessly eliminating excess capacity. Peterson Institute economist Nicholas Lardy argued last month that most of the “investment growth” we hear about is simply higher prices and real investment barely grew. If so, China may have less spare capacity than we think.

In a follow-up article, Lardy further explained that personal consumption data—which is much harder to manipulate—is more in line with economic growth. He says this is more meaningful than retail spending since China’s fast-growing middle class spends much of its income on services like education and healthcare.


Source: Peterson Institute

If investment and consumption are both strong, as they appear to be, then the remaining threat to GDP growth would be falling exports. Trade tension might eventually bring that on, but it hasn’t happened yet and China is already working to replace any lost US sales.

Export Substitutes
I’ve talked before about Alibaba (BABA), China’s e-commerce juggernaut that is, if possible, even more dominant than Amazon.com (AMZN). One big question for both companies is how far outside their home countries they can expand.

Alibaba took a big step in that direction last week. On the sidelines of a Xi Jinping-Vladimir Putin summit in Vladivostok, Alibaba said it was buying a 10% stake in Russian internet giant Mail.Ru Group. They plan to use the latter’s Russian social networks to build an e-commerce platform. Aside from the benefits it brings to both companies, the platform will be a new conduit for Chinese exports to Russia.


Source: Wall Street Journal

Now, it will be a long time before Russian consumers buy enough online goods to replace what China will lose in US exports if the trade war heats up further. The broader point is that Chinese businesses are not at the mercy of US trade policy. They have other options and are actively pursuing them.

Combine this with China’s massive “One Belt, One Road” infrastructure initiative, and you can see where the game is going. Alibaba, Tencent, and Baidu will be following the yellow brick, I mean One Belt, One Road, as will other big Chinese companies. Beijing intends to dominate as much of the Asian economy as it can. North America and Western Europe aren’t going anywhere but we aren’t the world’s growth centers anymore.

Perhaps strangely, that thought doesn’t bother me. Who’s afraid of a little competition? I think we will do just fine, thank you very much.

AI Waves

Artificial Intelligence, or AI, is the new Space Race. This time the US faces China instead of the Soviet Union and the outcome is not nearly as certain. Beijing wants to win and is pouring resources into doing it.

A new book, AI Superpowers by Kai-Fu Lee, is a must-read assessment of this battlefield. My friend Peter Diamandis recently shared Lee’s concept of “Four Waves” in AI development. Chinese companies are giving Silicon Valley a run for its money.

First Wave: Internet AI. These are the now-ubiquitous online “recommendation engines,” like the products Amazon says you should want, or the “suggested videos” that keep you on YouTube for hours. Those recommendations come from the data we generate with our clicks and other online activity. Lee thinks China’s data advantage gives it a slight lead over US counterparts in this segment.

Second Wave: Business AI. This is where we see computers analyzing data to make judgements once reserved for humans: loan underwriting, cancer diagnoses, and so on. AI excels in considering far-flung datapoints that a human analyst would discount or miss completely. Lee says the US has a commanding lead for now but China’s lag may actually help by letting it leapfrog over legacy technologies. The country went straight from cash to mobile payments, for instance, bypassing the clunky credit card apparatus we have difficulty abandoning.

Third Wave: Perception AI. You’ve heard about the Internet of Things. The devices around us, once connected to each other, will merge the physical and online environments into one seamless world. China has the lead in sensor technology and is already using it in factories, retailing, and law enforcement. Already they have stores where you literally scan your face to pay the bill. No card, no device, just the face that’s always with you. That’s where we are all going and China is going there first.

Fourth Wave: Autonomous AI. Machines that can both make decisions and sense the world around them will eventually operate independently. Autonomous vehicles are the most familiar example but it won’t end there. Imagine drone swarms extinguishing forest fires or painting your house. Chinese scientists are working on such things.

These are controversial and sometimes risky capabilities. They will face opposition in the US but less so in China, if that is what the government wants. Hence, I think China will probably gain the lead and possibly hold it for a long time.

Automatic Automation

Even without AI, Chinese manufacturers are automating fast. This is partly out of necessity: the country lacks skilled workers, especially young ones who can work long hours. Competition from lower-cost Asian neighbors makes raising wages difficult. The best answer is to get more efficient via automation.
Increasingly, the same companies that once thrived by reverse-engineering and copying Western goods are building their own advanced products. The government’s “Made in China 2025” initiative helps with generous loans and subsidies.

For instance, The Wall Street Journal recently profiled a heavy machinery maker called Sany Group. Among other things, Sany makes the pump trucks that blast cement to the top of tall buildings, plus cranes and other equipment.

»»» Read More…

• DiscoverGold

Click on "In reply to", for Authors past commentaries