The Hive is Alive?

by Chris Wilson, www.CycleSpreads.com & www.CycleETF.com. April 13, 2009

After posting a prior missive on FS (“Our Fear of Protectionism is a Myth”), I received a variety of interesting comments from readers, so I thought it would be valuable to share my recent first hand exposure on a recent trip to China. My wife is originally from China so we made a family vacation out of it. She had not been back for 10 years, so I was eager to see if her perception had changed since her last trip there. For myself, I was interested in measuring China’s financial footing and progress cast against the numerous articles and claims made here on FS.

First, I can understand the reaction so many money managers have in their first hand exposure to the country. Even in ‘suburban’ areas, there is a seemingly unending parade of smoke stack industries and new construction projects underway. On pure observation alone, one would logically conclude that China is indeed where the West was many years ago in the industrial cycle. In markets where western standards exist, there are definitely some interesting investment stories in this part of the world. So on the surface, I’d have to agree with managers like Peter Schiff who urge investors to explore investment opportunities in China. Below the surface, one must use an extremely thorough brand of research to really understand if these businesses have sound asset reporting and a strong pipeline of customers. Otherwise, one is left to the instinctual buyer’s response to the overwhelming kinetic activity seen virtually everywhere in this country. It makes America seem absolutely moribund in comparison. As many have discovered to their dismay, however, activity does not necessarily translate into enormous stock market payoffs. It’s true there’s a lot of new growth happening here, but how much of it is demand driven vs. government spending programs? My observation was that a surprising amount of the housing and factory development seems to occur in remote areas, leaving me to wonder how many of these projects are being legitimately spurred by business. Outside the major cities, I was not alone in noticing that many projects seemed halfway completed and unoccupied. Business people in China do not like to admit it, but this recent economic crisis has hit them hard enough to put many projects at risk of never completing or being shelved. Also, this is clearly a country that prides itself on busy work, as there are many more employees per customer in just about every business I encountered vs. the U.S. model. All of this leads me to conclude that divining which businesses are going to really succeed going forward will require the expense and expertise of money managers who may not possess the skills or resources to invest in that kind of research.

So is China going to take over the world as so many conclude? From a macro economic standpoint, the evidence looks convincing. Based on government-provided GDP, there is no comparable financial engine in the world. Still, China has some major hurdles to overcome. First, there are some major differences between where China is coming from vs. the west. As much as saying this causes me angst, I have to acknowledge that America’s founding values provided it with a much stronger foundation than China has. Many like to criticize the decay of morality in the U.S., but there’s definitely an ocean’s worth of difference when comparing the two countries. Americans respect their environment, but more importantly, they mostly respect their fellow Americans. I’m not talking about civil rights here either- I’m talking about basic human respect and the dignity of others- qualities many Chinese are sorely lacking in. These are hard-working, friendly people, but the lack of education outside the major cities is very telling. There is little regard for a sanitary place to live vs. the need to eat or get ahead of the next person.

The Base of the Not-So-Great Wall

My point is that exporting cheap products will be far easier for the Chinese than their brand of civility/morality. If you confine yourself to the modern metro areas of Beijing and Shanghai, you may not reach this conclusion, but the remainder of the country is uneducated and remains far behind even as new advances appear before them as the government structurally expands. The government is clearly counting on exporting the sophistication that comes with better jobs and education in Beijing/Shanghai to the midsize cities like Hefei, but that is going to take a long time. We’re all free to draw our own conclusions about the Chinese becoming the world’s superpower, but from my standpoint I’d say they have a long way to go even in addressing the basic needs of their own society. Some may argue that China’s lack of ideology is what makes it so ideal as a trading superpower, but does that qualify China to lead? Perhaps 50 years from now, but probably not in our lifetime.

Contact Information

Chris Wilson 847-370-1311 | Email | CycleSpreads.com | CycleETF.com