Chinese stocks fell 6 percent last night and are now in a bear market. Newspaper articles are raising concerns about overextended debt and falling growth rates. Looking out over the next three years, is now a good time to buy Chinese exposure?
IndexUniverse asked five macroeconomists and asset allocators for their viewpoints. Their answers are listed below.
Editor in Chief
The Forbes ETF Advisor
Short China; Buy Europe
After years of compelling growth stories and growth rates that were the envy of the world, China's economy is slowing faster than forecast and likely faster than its government data foretells. As a result, I downgraded the two China ETFs I track (the iShares FTSE China Large Cap (FXI) and the PowerShares Golden Dragon China (PGJ)) in my Forbes ETF Advisor to "sell" in the May issue while upgrading the ProShares Ultrashort FTSE China (FXP) to "buy." (To receive that issue, send me a request at email@example.com .)
In that issue, I also upgraded some of the more nuanced, narrowly channeled European-focused ETFs, like the Vanguard FTSE Europe (VGK) to broader-based EAFE ETFs. My view is that I'd rather go bargain hunting in more established and more transparent marketplaces at this juncture in the slow to slowing-growth global environment. This doesn't mean China won't have its role to play in a long-term investor's portfolio. But I think that unless and until Europe turns, China won't. So for now, the risks of being upstaged by even a small stake have me favoring rubies in Europe's rubble to any yen for China.
Or to put it another way:In one of my favorite films, detective Jake Gittes is told by Lieutenant Escobar, "Go home Jake; I'm doing you a favor." For investors, I'd change that to read, "Do yourself a favor:Stay closer to home."
[ Dennis Gartman's opinion is next.]
The Gartman Letter
Yes, It's Time To Buy
Is it time to buy China? At this point, I think the answer is yes, though not a resounding yes; not a vehement, unmitigated, unhedged yes, but yes nonetheless. I could not care whether the market is down 20 percent from its high in supposed "official" bear market territory, for I've never been one to assume that rigid rules such as this have a place in the world of investment.
The question is, Have the authorities lost control of the circumstances in China? We think not. In fact, I think that the nonaction taken by the Chinese monetary [authorities] … and obviously the acquiescence of the newly in-place political authorities … was a warning shot across the bow of the economic ship there, telling the market and especially those in the housing and/or commercial real estate markets that they cannot believe unequivocally that the government will be there to bail them out of uncomfortable and uneconomic situations.
The People's Bank of China has made it clear that there are indeed consequences to be suffered should investors become overextended. This, I think, is a very good thing.
So the weakness of the past several weeks is very probably an opportunity into which to become involved in China once again, for I've stood aside from the global equity market since February and now have dry powder to put to use. I'll put it to work firstly in China.
[ Tyler Mordy's opinion is next.]
Director of Research and Co-CIO
Hahn Investment Stewards
The Bear Case Is Widely Known; Consider The Bull Case
The bearish case for China is well known—including overleverage, overbuilding and overcapacity (China continues to invest half of its GDP)—with a declining return on investment for the state sector. On top of that, there is a large, opaque "shadow banking system" that poses a systemic risk to the entire credit system.
On the surface, most of these arguments appear bearish. In particular, breaking up the state-owned monopolies will surely come with dislocations and unknown risks. The transition will be hazardous.
However, all of the above is the widely accepted outlook. How much is priced in? China shares, particularly banking stocks, are cheap. Shorter term, they could easily fall further. But taking a longer view, consider some bullish arguments:
First, concern with rising wages is overblown simply because that trend reflects rising productivity. Chinese firms continue to increase global market share, even though manufacturing wages are up 7 times since 2000.
Second, the Chinese economy remains flexible, moving much of its low-end manufacturing sector to other jurisdictions or moving to higher-value-add enterprises. This is a classic example of an economy transitioning to more market-based forces.
Finally, continued growth in the "shadow banking" system may be a sign of progress (as it is more market driven) and not approaching crisis. Over time, the official Chinese banking system will look more like the shadow one, not the other way around.
[ Bill Witherell's opinion is next.]
Chief Global Economist
Limit Your Exposure For Now
China stocks have been hit by the tightening in China's credit markets at a time when global markets are still reacting to concerns that the U.S. Federal Reserve is going to reduce its injections of capital sooner than some expected. A broad retreat from emerging markets was underway before these developments in China. I see the moves by the Chinese Central Bank as being good for the long-term sustainability of the Chinese economy.
The People's Bank of China needed to let some air out of the credit market bubble and impose some increased market discipline. There is no overall shortage of funds and the People's Bank is able and ready to provide liquidity to any banks experiencing funding problems. The immediate sharp market reaction reflects fears that economic growth will be impacted; that is, indeed, a risk and growth had already been moderating. My expectation, however, is that any negative economic effects will be limited and transitory. Addressing financial problems now should be a positive for the economy and China equities over the next three years. The current pullback in the China market does appear to be a buying opportunity, although it would be wise to wait for markets to settle down.
Among the China ETFs, we would prefer to limit our exposure to Chinese financial institutions at this time. In our International and Global Multi-Asset Class portfolios, we presently hold PowerShares Golden Dragon China (PGJ), for which financials account for only 1.47 percent of the holdings; and Guggenheim China Small Cap, (HAO), with a financials share of 2.48 percent. In contrast, the iShares FTSE China 25 (FXI), includes 56.59 percent of its holdings in financials.
Fairfax Global Markets
Big Boom Coming; Commodities To Benefit
The Chinese stock market has recently sold off over fears that the Chinese economy will continue to slow down. Investors need to understand Chinese growth cycles. Just as politics and Federal Reserve policies affect U.S. economic growth, so do the official Chinese five and 10-year economic plans in this centrally planned economy.
Chinese officials take these five and 10-year plans very seriously, and government officials throughout the system are held accountable for the strict implementation for each part of the plan they are responsible for implementing.
Chinese leadership changes every 10 years and at the end of 2012, President Xi Jinping and the new group of politburo leaders have just come into power and are just starting to complete their new five and 10-year economic plans.
The central focus of the previous 10-year economic plan was on transforming cities in preparation for the 2008 Summer Olympics. Most of the plans were tied to that deadline and China was largely successful in completing most of these plans. This focused effort of massive spending tied to a specific event and specific dates explains the phenomenal Chinese GDP growth leading up to 2008.
Having met most of their long-term economic planning goals by 2008, the previous Chinese leadership has coasted for the past four years. They also understood that double-digit GDP growth was unsustainable, so they purposely announced they would slow future growth to somewhere between 6 and 7 percent. They have been successful in achieving that goal with what is described as a "soft landing."
China's New Five-Year Economic Plans
The new leadership has recently released its new five-year economic plan, and the sheer sweep of this ambitious plan is hard to conceive. This plan intends to completely restructure and diversify the entire Chinese economy from a largely export manufacturing economy to an integrated economy similar to that of the United States.
One of the most ambitions projects in the new plan will move 250 million people from rural areas to newly constructed cities over the next 12 years. That is like building new cities for almost the entire population of the United States over the next 12 years.
Think about the roads that will be built, the copper, steel and concrete that will be needed, the electrical and telephone grids and lines, and the new economic development that will come from this infrastructure investment.
Think about the cars and refrigerators and air conditioners and microwaves and computers and everything else that will be bought by these new 250 million relocated consumers.
Recently, we have seen "capitulation selling" in gold, copper and other industrial commodities. Usually when you see this kind of "blood in the streets," we've hit a bottom in the market.
China is the world's biggest driver of copper and industrial commodities.
When Will These Plans Start To Affect Commodities?
It's not a question of "if" this new Chinese five-year economic plan will be implemented, it's only a matter of "when" the effects of this new plan will start being felt in the commodity markets and other economic sectors.
The five-year plan has been announced, the engineering plans have already started—the big question now is, When will the purchasing begin?
Currently, commodity prices are at multiyear lows. This situation will not last long, as China embarks on its new five and 10-year infrastructure programs that will drive all industrial commodity prices much higher. Now could be the time to start investing in commodities and China again.
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