Beijing, People's Republic of China – While other investors are busy rounding up all sorts of economic data, tea leaves and fortune cookies in an attempt to figure out China's economic situation next year, I'm heading out the door once again to take a look at hairy crab prices.
Because of the timing of this trip, I'm a bit late in the season – but not enough that I won't be able to get a good reading on this surprisingly accurate indicator of China's economic health.
The delicious little morsels come into season each fall, and are regarded as a delicacy – not to mention as an important indicator of this Asian giant's wealth and prosperity. People flock to various restaurants to eat them. The tiny little guys are given as gifts to business partners, family members and others. Live hairy crabs are even being sold in vending machines in such big Chinese cities as Shanghai.
As consumerism continues to supplant exports as an engine of growth in China, market-watchers look high and low for the best gauges of the country's outlook for growth. My two decades of work in Asia has steered me toward some surprising – and surprisingly accurate – economic indicators. Hairy crabs is one example (in fact, this has been dubbed "The Hairy Crab Indicator").
If you've never eaten a hairy crab, they're certainly an acquired taste. Usually served steamed – with a splash of soy sauce – they can be oily, or even downright messy. Hairy crabs are usually smaller than the Dungeness crabs many Americans are more familiar with. These freshwater crustaceans start to fatten as soon as the autumn chill cools the Yangtze River Delta. That adds to their taste and desirability.
These crustaceans get their name from the clumps of fiber-like yellow hair that grow on their undersides, their legs and around their pinchers. Hairy crabs have been harvested in the Jiangsu province for hundreds of years, and have been a stomach-pleasing favorite for just about as long. From Jiangsu, the crabs are shipped to Shanghai and even Hong Kong.
When China's feeling pinched, hairy crab sales drop and prices plummet. At the moment, they're up 30% from last year to a staggering 680-700 yuan per kilo (roughly $105) or more – which suggests just the opposite. Record prices, to be sure, which point to prosperity.
In other words, what this says to me is that China's domestic economy is on the move, that people are flush with cash to spend on such luxuries and that they're anxious to impress. This stands in stark contrast to the 80% drop in hairy crab prices I reported in early 2009 – right before Chinese equity markets crumbled to levels not seen since the Asian Financial Crisis a decade ago, or during the SARS epidemic in 2003.
Obviously, hairy crabs aren't a perfect indicator, given that there are a whole host of variables that can affect pricing. For example, a salesman in the the Nieji Yangchenghu Crab Store in Beijing's Changping District told the Global Times that this year's record prices probably reflect of combination of factors – including rising transportation costs and reduced crab output thanks to unusual weather and strong demand.
But I'll take 'em nonetheless, because the demand is what makes the difference. And demand is an indication of the "New Consumerism" that continues to take hold here in Mainland China. I wish you were here to join me. I'm heading over to Fang Liang Xieyan, which is the Beijing offshoot of an old Shanghai favorite. I'm hoping to score a few ounces and a crab banquet for between 380RMB to 1,680RMB – or roughly $56 to $250, depending on my order.
If you understand that Beijing is rebalancing China's economy to emphasize internal consumption over export-driven growth, you'll also understand that you need to invest (or adjust your investments) accordingly. I suggest you get started this way:
Root out those companies on U.S. stock exchanges that have already made up their minds to participate. Three examples that immediately come to mind consist of fast-food icons McDonald's Corp. (NYSE: MCD) and Yum! Brands Inc. (NYSE: YUM), and semiconductor-equipment giant Applied Materials Inc. (Nasdaq: AMAT). McDonald's just because it's the first western non-financial company to float yuan-denominated "panda bonds" to fund market expansion in China. Yum! operates the Pizza Hut, KFC and Taco Bell chains – each of which are doing well with China's growing consumer class. Applied Materials relocated its solar research-and-development arm to Xian knowing that it will be able to develop a full line of global products there – and also sell directly into China.
Invest in small-cap Chinese companies in the healthcare, infrastructure and urbanization businesses. Some – like China Integrated Energy Inc. (Nasdaq: OTC:CBEH), which is an integrated fuels play – are pretty straightforward, while others, like Chinacast Education Corp. (Nasdaq: OTC:CAST), which is involved in private secondary education, may take some digging to identify and understand.
Pick up one or more of the small-cap, exchange-traded funds centered on China's markets. I particularly like Morgan Stanley China 'A' Share Fund Inc. (NYSE: CAF), for instance, because it's focused on China's tough-to-acquire "A" shares. Thanks to its unique structure, it's one of the very few ways investors can currently participate with direct ownership in China.