Edward Chancellor, the very well-respected British financial journalist, recently penned a little paper called “China’s Red Flags” in which he argues China shows all the classic signs of a bubble economy. Chancellor has written several books which focus on market speculation and crashes, so the temptation is to respond that he has "man-with-a-hammer" syndrome: to the man with a hammer, every problem tends to look pretty much like a nail. I am not alarmed by Chancellor’s thinking, and I think he makes some good points. But my response is that no country’s growth path is perfect, and there is more than enough to like in China right now.
One reason to like China is that a long-term bet on China is also a bet on the competence of the Chinese government in handling its economic affairs. It is doubtful that in even the worst possible scenario, it would mis-manage the Chinese economy so badly that it could reach a state of crisis as bad as the the recent American economy. One major advantage to the autocratic Chinese system is that it does not have the liabilities of the messy, uncoordinated (and poorly regulated) American system. Chinese authorities can step in and change lending policies whenever they want, since there is no need for a democratic consensus. The government is sophisticated enough, and Chinese economists are not bogged down by ridiculous free market economic theories like Western economists are.
Still, in a country the size of China, there are bound to be some mini-bubbles. Perceptive North Americans living in China like Shaun Rein can fill in the details here. And China naysayers like Jim Chanos can probably make a lot of money with savvy shorts on certain Chinese equities. But the big picture is that without question, China will grow at a tremendous rate in the years ahead. That is a very simple macro view, and you may as well make some money based upon its truth.
Jim Rogers, Warren Buffett and Charlie Munger all agree that China is possibly the best bet of the current century. Rogers (whom I would call a “meat and potatoes” investor) is a self-proclaimed lousy market-timer, so his strategy would be to buy and hold Chinese equities. This is good advice for those of us without the resources to buy large chunks of superb Chinese companies like BYD (OTCPK:BYDDY) at cheap prices, which is what Buffett and Munger did. I plan to follow Rogers' advice and hold my Chinese equities for many years.
One nice pick for China investors is HAO, a small-cap ETF with a relatively reasonable expense ratio of 0.70%. Growing Chinese small-caps should be able to take advantage of economies of scale and the immense size of the Chinese consumer market. Since the Chinese market rebound in early 2009, HAO has handily beaten the Shanghai index by almost two-fold.
Another long-term macro trend is the enormous growth in demand for commodities. This demand stems from population growth and increasing wealth in developing countries like China and India. It is a very simple story, and the bet is just that commodity supply cannot keep pace with demand. Again, Jim Rogers made this call nearly 15 years ago when he started the Rogers International Commodity Index (RICI). Since its inception in 1998, it has killed the S&P. During 2008 to 2009 it saw a massive drawdown from nearly 6000 to under 2500, but even with its comeback the past year, this simply means it is a good time to buy.
Taking a look at the Rogers Index chart here, one sees a classic demand-driven secular bull market, which contrasts nicely with the S&P. They move up and down at the same time, but the overall trend favors the commodity index by a mile. And that’s the power of long-term global macro demand shifts right there.
Disclosure: Long HAO.