FORBES 7/16/2013 @ 2:01PM |12.793 views
China May Have Ghost Cities But Rapid Growth Is No Apparition
Stephen Leeb, Contributor
China has hit targets in virtually everything
central planners have ever outlined. Plenty of naysayers cite China’s
purported credit-debt bubble and its supposedly overbuilt infrastructure.
Often, critics like “60 Minutes” cite China’s putative ghost cities,
fully built urban areas where supposedly few to no residents live.
I am not alarmed by China’s so-called ghost cities,
much less Chinese overbuilding or vulnerability to a crash. The fact
is, China’s urbanization goal requires that it build roughly 100 cities
in the next decade, vastly greater than the scant, same five “ghost
cities” belittled again and again over the last decade.
Of the targets, Ordos has garnered the
most publicity, probably due to its size and Mongolian desert location.
But two documentary filmmakers, Adam Smith and Song Ting, offer a very
different and compelling assessment. Ordos “sprang to life” on the heels
of a major coal discovery. That led to massive building. Really, Ordos
includes two cities, one already a vibrant metropolis of 2 million
residents whose average income matches that in the U.S., the second as
yet small, but as the film makers suggest, starting to catch fire.
Whatever overbuilding China may have done, it was
simply insufficient to create an economic crisis. The IMF authored the
most comprehensive report to date on Chinese over investment. China’s
debts, unlike those of the U.S. and most other countries, the IMF notes,
are owed to China itself. Therefore, the risks of a full-blown Chinese
economic crisis remain small.
The misallocation of resources does create some
economic strain. The IMF calculates that these translate into a subsidy
from households to large state-owned enterprises, of roughly 4% of GDP.
However, if that figure is accurate, or even somewhat higher, Chinese
per capita income has nevertheless grown faster, over a much longer
period of time, than in any country since the advent of capitalism. In the last 13 years, by contrast, real U.S. median incomes declined about 10%.
Moreover, the IMF and Western analysts in general
judge investment returns along a fairly short time horizon. China
probably views returns on investment in its infrastructure, especially
in energy, as heavily back-loaded. Chinese academic articles predict
peak coal sometime in the next decade. Clearly, the world ought to start
to prepare now, although gains will not be evident until coal supplies
start to lag demand.
To me, this provides yet another indication that
China sits on firmer ground than many believe, and that fears of a
Chinese real estate bubble in particular are way overblown. Here’s a
number never cited in the U.S. press, real estate price changes relative
to GDP. Broad-based measures of home or property prices in China, show
that gains over several years pretty much match GDP growth.
During the U.S. housing bubble, by contrast, home
prices increased several times faster than annual growth in GDP.
Similarly, in Japan, real estate prices during the late 1980s rose many
times faster than GDP growth, while P/Es on the Nikkei in the same
period often rose to triple-digit levels. In China, current P/Es remain
at the single-digit level. In a country as big as China one would
normally expect to find pockets of overvaluation in virtually all
assets, but I think China’s critics have wildly exaggerated the extent
of the problem.
In fact, China’s economy is no longer export driven. Retail sales and internal consumption are growing along with GDP.
Since so much evidence against China is anecdotal, here is a contrasting anecdote. The current No. 2 in China’s hierarchy, Li Keqiang,
also responsible for economic policy, for five years earlier worked
beside former economic minister Wen Jiabao. Since his portfolio then
included the entire array of economic management, arguably his knowledge
of the Chinese economy is second to none. If China really faced serious
economic trouble, I doubt he’d have eagerly accepted his current post.
Actually, Li campaigned for it and landed in a government position even
higher than that of Wen, previously No. 3 in the pecking order. To the
best of my knowledge, the Chinese aren’t famous for acceptance of
suicide missions.
So what investments are leveraged to Chinese
growth? With so many cities and so many infrastructures left to build,
commodities will, as mentioned in a previous blog, naturally benefit.
The biggest bang , however, could be in the Chinese stock market. A
profound laggard in recent years the Chinese market could play catch-up,
big time, as the government continues to liberalize its markets. The
government now mostly shuts out foreigners from the vast majority of
Chinese stocks. That is changing quickly as the Chinese seek an ever
greater role for their currency, the Yuan, in world commerce. Gradually,
the government is opening the gates to foreigners to invest directly in
Chinese markets, although for the typical retail customer, pickings
remain pretty slim.
Here are several picks available to all investors.
Industrial and Commercial Bank of China, which trades under the symbol
IDCBY, is one poster child of more liberalized Chinese markets. The
largest Chinese bank trades with a P/E of only 5.5 and yields over 6
percent. With such metrics the bank looks to me like a great bet that
China is far from the verge of total collapse. I also like the China Fund CHN +0.74%
(CHN), which probably offers the best way to get a stake in all the
ultra-fast growing Chinese companies still closed to foreigners. The
fund has sharply outperformed all the major Chinese stock averages.
Additional plays representing China’s upward mobility theme include the internet and software companies Baidu BIDU +2.02% (BIDU) and NetEase (NTES), Internet retailers like travel-based Ctrip.com International
(CTRP) and ECommerce China Dangdang (DANG). For those who might
consider individual Chinese stocks a tad too risky, there is always the
large cap iShares FTSE/Xinhua China 25 Index (FXI), an ETF that focuses
on bigger state-owned businesses.
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