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Greetings Traders:
This report has been sent to me by my mentor and appropriately describing
the "situation" in the Mainland now. Regards
Have a good one
Jeff Harteam
Hong Kong
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Global: The World's Only Growth Story
Stephen Roach (New York)
China is continuing to have extraordinary success in separating itself from
the rest of the pack. That's true of its economic performance when compared
with the rest of Asia. It's also true when compared with the rest of the
world. Ironically, the Chinese, themselves, don't see it that way. To them,
China is still a poor country in the midst of a most daunting
transformation.
This contrast between how China sees itself and how the world perceives
China was the overriding theme of a one-week tour I have just completed of
Beijing, Shanghai, Suzhou, and Shenzhen. Accompanying me were a diverse
group of senior investors and industrial leaders from Europe, Russia, South
Africa, and the United States. Some were seasoned China hands. Others were
not. But all of them walked away truly staggered at what they saw.
In the macro business, it's easy to get caught up in your own point of view.
Since I go to China so often, I welcomed a fresh perspective. I last led a
similar mission some 18 months ago. The contrast between these two trips is
a great way to benchmark shifting perceptions about China's journey. A lot
has changed in the world since the spring of 2001, especially the context of
a much weaker global economy. But as I look back at my notes from both of
these trips, it's the transformation of China that jumps off the page. What
seemed so tentative to many a year and a half ago, no longer does. China has
come of age in shaping its own destiny and in impacting the broader global
arena. One the of the savviest and most seasoned investors on the trip,
summed it up succinctly, "China is simply mind blowing."
China's economic progress is evident on three fronts -- breadth, depth, and
scale. In terms of breadth, it's all about China's gathering success in
moving up the value chain. That's true of the shifting composition of its
exports -- away from consumer softgoods and into increasingly sophisticated
electronics and other forms of information technology. Andy Xie has
calculated that high technology goods have accounted for 42% of China's
export growth in the year ending August 2002. But it's also true in the
shifting mix of its aggregate demand -- especially the emphasis on domestic
demand. China's growth dynamic is still heavily dependent on exports -- this
segment of the economy accounted for 54% of total GDP growth in the first
half of 2002. There is growing recognition in the Chinese leadership that
such external reliance is excessive and must now change.
As such, support to domestic demand is now very much the focus of Chinese
macro policy. The trick, of course, is to pull it off. Infrastructure
spending continues to play an important role in this regard, but there are
also budding signs of an emerging consumer culture in China, as well. That
stands in sharp contrast to what was evident 18 months ago. Nowhere was that
more obvious than in Shenzhen -- Hong Kong's twin city near the mouth of the
Pearl River. We had a fascinating meeting with Shenzhen's dynamic and
relatively youthful mayor, Yu Youjin. He was as impressive as any politician
in the West, and was filled with energy in describing the explosive growth
of this 22-year old city that now has a population in excess of 7 million.
Shenzhen is loaded with some of China's most dynamic and exciting companies;
we met with two of the most impressive ones -- Huawei Technologies and Ping
An Insurance. But the statistic that stuck most in my mind was Shenzhen's
youth -- a population with an average age of 29, making it perhaps the
youngest major city on the world today. The streets are alive with shops,
movie theaters, and car dealerships; there is even a Sam's Club. You get a
real sense that the birth of the Chinese consumer is now taking place in
Shenzhen.
In terms of depth, China's progress is also unmistakable. Infrastructure
lays the groundwork. It's not just roads -- now some of the best in the
world. It's also the wiring of the Information Age. We visited the Suzhou
New District (SND), an industrial development zone about two hours west of
Shanghai by car that has only been in existence since 1990. The
52-square-kilometer area comes complete with its own fiber optic telecom
grid. From Motorola and Dupont to Sony and Canon, some 614 foreign
multinationals have set up business in the SND. We spent some time with
Solectron, a leading electronics outsourcer, and learned first hand of the
appeal of China. Due to the global IT slump, Solectron has pared its
worldwide headcount by 30,000 over the past couple of years; however, its
staffing in China is going the other way, led by a doubling of its current
facilities in Suzhou.
Yet there's more to infrastructure than just highways and telecom cables.
It's also about human capital -- scientists, engineers, and the development
of a new managerial class. The Chinese are the first to concede they have a
real problem on the management front: The legacy effects of a planned
economy left a glaring hole in this key segment of the labor force. To get a
better understanding of how China is attempting to overcome this problem, we
spent part of the afternoon at one of China's leading new business
schools -- China Europe International Business School in the Pudong area of
Shanghai. The briefing from the CEIBS administration was impressive, but the
students said it all. Bright, inquisitive, well-informed, articulate, and
energetic, they compared favorably with any we had run across in the West.
China has been lagging in its investment in human capital. A recent paper by
Nobel laureate James Heckman found that China's public expenditures on
education stood at just 2.5% of its GDP in 1995, less than half the 5.4%
ratio in the US but not all that far from Japan's 3.6% share. As efforts
such as those at CEIBS expand, I believe there is nothing but upside to
China's potential on the human capital front.
The combination of physical infrastructure, human capital, and new
technologies speaks volumes to the ultimate arbiter of China's depth --
productivity enhancement. It's an increasingly challenging combination for
the rest of the world to face. As one of more seasoned industrial leaders on
our trip said, "I don't know of anyone in the electronics business that
isn't contemplating a major investment in China to the tune of $1-2 billion
per plant. Any company that doesn't," he concluded, "will find its
performance punished." Nor is there a problem with product quality. I heard
this earlier on my Asian tour from the senior management of Sony in Japan.
They stressed that there was absolutely no difference whatsoever in the
product quality coming from Japan or from their five manufacturing plants in
China.
We also saw the quality story first hand at Huawei, the giant Chinese
counterpart of Cisco. With its vast array of telecom network solutions
conforming to the international quality standards and protocols, Huawei's
cost efficiency loomed all the more formidable. As one of the investors
said, "It's easy to lose money in technology these days, but Huawei may have
the best cost structure in the world to produce increasingly commoditized
technology products. The high-cost industrial world isn't even close." Nor
is Huawei just about cheap, high-quality production. It is nearing
completion on a new R&D complex in its Shezhen campus, a high-rise facility
that can house up to 10,000 of Huawei's engineers and scientists. China has
long been criticized for its lack of IT innovation. Huawei's massive R&D
efforts promise to challenge that perception.
Which brings me to scale -- the third dimension of the Chinese economic
miracle. China has never been small. However, while it contains fully
one-fourth of the world's population, it currently accounts for only about
4% of world GDP. China's leaders continue to stress this latter statistic in
minimizing China's impact on the world at large. But it's change at the
margin that matters most in shaping global trends. On that count, there can
be no mistaking the impact of China's rapidly increasing scale. While China
now makes up about 4.5% of global trade, Andy Xie estimates that the nation
currently accounts for approximately one fifth of the growth in global
trade.
Scale has always been China's siren call. The generic refrain we have all
heard for years, goes something like this: "If each of China's 1.3 billion
citizens were to buy only one paper clip a year..." That really misses the
point. The past 20 years of economic development have raised the base for
industrial output, exports, and even domestic demand. Huawei, itself, speaks
volumes about the scale of China's growing industrial clout. And it is only
just the beginning. In Japan, I also met with Nissan's management. They were
astonished that their vehicle sales in domestic Chinese markets were surging
by 80% from year-earlier levels; moreover, they stressed that the
comparisons were not off a small base. Say what you want about the
stereotypical Chinese worker making a dollar a day. There's a critical mass
forming in China that now puts the scale of its accomplishments in a very
different light.
Which brings me to the bottom line of my latest sojourn to China: China is
now beginning to come to grips with the global context of many of its macro
problems. The senior officials we met with in Beijing were quite frank in
expressing their concerns about global deflation. They were also convinced
that an overvalued US dollar was ripe for a fall. Moreover, official Beijing
now concedes that both of these developments have important consequences for
China. This is a subtle but important shift. I detected greater concern on
both counts than I did in several visits earlier this year. To me, that's
real progress. The difference comes in the sticky area of blame. China
argues that it is an innocent bystander -- and a source of resilience -- in
an otherwise shaky global economy. The rest of the world sees it
differently -- that China's emerging economic prowess is now part of the
problem.
It's tempting to find a scapegoat in tough economic times. It would be one
thing if the world were booming -- there would be plenty of prosperity to
share. But with today's global economy in lousy shape, it's more of a
zero-sum game -- one country's gains can often come at the expense of
another's. Such are the pressures and finger-pointing that China must now
face. One of the investors on the trip summed it up best, "Just as the world
must now cope with China, China must also cope with the world." The global
response to China looms as one of the biggest unknowns in the macro
equation. It could well be the most important test of all for the world's
greatest growth story.
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-----Original Message-----
From: EarlA [mailto:earl.a@xxxxxxxxxx]
Sent: Sunday, November 10, 2002 12:47 AM
To: realtraders@xxxxxxxxxxxxxxx
Subject: [RT] Answer ?
Sue,
I suspect that the world is more complex than that. Yes, the USA is a
Titanic stock and credit bubble headed straight for an iceberg. However, the
financials (especially stocks) investment climate world-wide is exceedingly
hostile. A quick tour of world economies yields little hope: Europe is in
the doldrums, Germany is in the pit, Japan remains in the pit, and (with one
exception) the balance of world economies are irrelevant because they lack
the required depth to support major investment. Thus the impetus for major
shifts in capital flows is lower than one might think ... more likely the
entire world will sink together. The one exception seems to be China, which
by all appearances is booming.
Speaking directly to the US stock market, I believe it remains hugely
overvalued and far from washed out. There are two factors to market movement
... price and time. While the NASDAQ has had the kind of price washout last
seen in the early 1930's, the larger cap indexes have not. I believe that
intervention has been successfully used in the markets to prevent the kind
of fast price washout many of us expected. This degree of success suggests
that the price washout may be more moderate and time will be much more
extended ... eventually the piper will be paid. This will be exceedingly
frustrating for bulls in a time where everything must be "instant" including
stock market bottoms. Bottom line, I expect we are going to see a trader's
market for the next 10+- years. Those who can trade both sides of the equity
market will be able to extract good returns.
The globalization of world trade has induced wide-spread goods deflation.
Quite simply, global companies are constantly shifting production to the
best value (cost, skills, and education) labor markets they can find
world-wide. China is and has been the market of choice for some time now.
Just as US manufacturing jobs were exported to Mexico and South America,
those jobs are now being exported to China. Thus, China is a vast
manufacturing machine which is under-cutting the entire world. (As an aside
to the technology bulls e.g. CSSC, I would note that China is fast
developing a very capable high technology research and development base).
Ultimately, such high demand for Chinese labor will increase costs, however
that is probably some years away. In the meantime, the rest of the world is
getting cheap goods in exchange for loss of its (national) manufacturing
base. There has never been a deep global recession (or depression) with
service based economies and I believe the outcomes will be much worse than
expected. This is a problem for all major economies ... Japan already feels
this and Europe and the USA are both highly dependent on imported goods.
The service economy is another matter. Costs for services have been
generally rising, however I believe that much of this demand has been fueled
by credit. Most so-called industrial economies have become service
economies. Should world economies enter deep recession, I believe the
service sector will become more cost competitive to compete for decreased
discretionary spending. While we have yet to see this in sectors such as
health care, we are already seeing it in sectors such as the fast food
industry.
Ultimately, it will be the (mostly US) credit bubble which sinks the world
economies into deep recession ... consumers because there is no money to
spend and producers because the consumers stop spending. The unwinding of
the credit bubble will be deflationary unless the policy makers (read
interventionists) find a way to unwind it slowly. This is unlikely
in-as-much as the Fed is still busy cutting costs for credit in an attempt
to stimulate demand on the part of already over-extended consumers and
business.
The charts certainly suggest that a major decline in the US dollar is in
order ... it is overvalued. However, once again the global investor is
confronted with the dilemma of finding an investment/currency environment
which offers superior/safer returns and that (for reasons mentioned earlier)
is hard to find. The Fed's rate cut (and failure of the BOE and ECB to lower
rates) certainly means European investment will get a bit of increased flow,
however this advantage will be transitory as the BOE and ECB will be forced
to cut rates to stimulate their own economies very soon.
While some see major bull markets emerging in commodities, I do not share
that view. Localized supply/demand conditions (crop weather, strikes, war,
etc.) will make for some wild swings, however a cyclical bull market in
commodities seems inconsistent with my view of a world economy which is
over-extended and likely to contract.
I do not currently hold much in bonds ... I made the mistake of exiting much
of my bond holdings a bit prematurely. However it is likely that high
quality US and European government bonds will provide superior returns over
the next 3-5 years when compared to other assets, although there could be
some wild valuation swings which many bond investors may not want to
stomach. History from the 1930's, as well as modern Japan, tells us that
long term bonds yields can drop to 1-2% which is much lower than current
yields.
To summarize, my economic views have not changed much in several years nor
is it likely they will change much in the foreseeable future. The late great
bull market in equities, together with the easy money is gone, quite likely
for several generations. There will be opportunities for traders, far fewer
for investors ... there are few safe havens when the global economy is on
such shaky ground. All of this, however will pass ... quite likely by early
in the next decade ... and the world (and USA) will once again prosper.
And I would keep an eye on the shills of Wall Street ... if they say buy
XYZ, consider selling it. If they say sell XYZ, consider buying it.
Earl
----- Original Message -----
From: "sue crew" <screwy@xxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Friday, November 08, 2002 6:50 PM
Subject: Re: [RT] Answer my friend
> Earl,
>
> what is your view of things at the moment.? The USA to me looks like the
> big titantic sinking and nothing is going to help.
> Monetary policy will be ineffective - and close to zero just like Japan.
> Everyone due to Superfunds are heavily weighted to equities, the ageing
> population and risk aversion will drive markets in my mind, and will
> particularly drive equity markets down. The information ratio will
> become the new focus.
>
> Cash and bonds will rule for the next 15 years.
---
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