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A "Fly On The Wall" Is Bullish On China, The Mother of All Economic Expansions

Economics / China Economy Jan 24, 2010 - 04:23 AM GMT

By: Mario_Cavolo

Economics

Best Financial Markets Analysis ArticleStop listening to the bubble doomsayers and pay attention to the realities of why China’s expansion will continue for many years. My observations as a fly on the wall are a collective reflection of what I and other foreign businesspeople living here for five to ten years have experienced.


The Mother of All Expansions

1. China’s expansion right now is the same as the U.S. postwar expansion. It should be easy to recognize the parallels: inflation of consumer prices, real estate, the cost of doing business, continued asset inflation with rising stock markets are all hallmarks of a country’s economic and societal emergence.

2. China’s expansion is fired by huge supplies of a fuel called cash We know about the trillions in the government sector. This is an amount well in excess of any projected debt levels in Beijing’s budget. The South China Morning Post’s Tom Holland looked more closely at debt levels and potential bad loans that could boost total debt to a worst-case 55% of GDP, about the same as Britain. However, one must remember that the economy and tax revenues are growing solidly — plus Beijing has no shortage of assets to set against its liabilities. So even with the concern over the GDP/government debt ratio, they have the cash – a crucial difference that make China like a corporation with $1 billion in debt but $2 billion in cash.

3. China is embracing American capitalism, and consumer spending is on the rise. Internally, the country’s expansion is in an American-style boom stage. While America is at the other end of the cycle, it has just begun here and promises to continue for many years.

4. Big business here — banks, insurance, energy, and more – got its start as a big bureaucracy. While Americans are concerned about their government getting into banking and other businesses, in China that’s how it already is, but the trend is going the other way, toward privatization through stock and bond offerings. Regarding the banks’ level of services to account holders, my online account with ICBC is amazing: we are able to trade stock funds, gold funds and physical gold, plus most major international forex pairs in online savings accounts round-the-clock.

New Subways Everywhere

5. The expansion of infrastructure recalls America in the postwar years. There is massive expansion of subways and high-speed rails. I’m talking half-a-dozen new subway lines being added in each city, not just one or two, and high-speed rails that will connect all major cities at 300+ kph. They won’t need as much oil for airplanes when high-speed train travel is a widespread option. It is easy to identify these projects by typing in the keywords online. Numerous high-speed lines have opened this past year with the major Beijing-Shanghai line covering 1,300 kilometers in five hours instead of the current 14 hours.

6. Road construction to accommodate an automobile boom has also been spectacular, much like the construction of the U.S. Interstate Highway System.

7. Foreign direct investment continues to point toward Asia, with China leading the way. The crisis in the first half of 2009 short-circuited the global economy, but investment has returned almost to previous levels, with FDI continuing to favor China. This, in spite of a European Commission annual report noting that it has become more difficult for foreign firms to enter the Chinese market.

Real Estate Bubbles ‘Limited’

8. Rising real estate prices is a phenomenon of the time, no different than that experienced during similar cycles in the U.S. and Europe. However exorbitant bubble-price problems exist only in limited areas, with more reasonable price increases occurring in second- and third-tier cities that have a well-developed middle class. For example, in Shenyang, Liaoning province, apartment prices are now averaging USD $70-$120 per square foot. Does that sound like a bubble?

9. A rising stock market. Admittedly, market prices are peaky — but again, we need to remember that this is a market not fueled by debt, but by government and private-sector cash in an unprecedented regional expansion where power is constantly shifting.

10. Debt levels far lower than in the West. Starting with a decade of 36% savings rates, we can begin to grasp the amount of cash in the private sector — similar to Japan, even amongst the lower and middle classes in China. Relatively speaking, the cost of living has been three to five times lower than in the U.S. or Europe, including the cost of real estate. That is why until now there has been very little mortgage and credit card debt amongst the citizenry. With the current real estate boom pushing prices toward Western levels, mortgaged properties still comprise far less than half of purchased properties, and those properties that are mortgaged require a 30% down payment.

In addition, bank credit card marketing is literally a new industry, with banks only starting to encourage “plastic” during the past two years.

Real Jobs

Pay close attention to this comparison of low-level jobs in China and the U.S. It paints a realistic picture of typical employment for low-to middle-income workers/managers working for a Chinese companies (multinationals pay much higher salaries):

11. Low salaries, akin to the U.S. minimum wage. For example, a restaurant or hotel department manager may earn a monthly salary in the range of USD $300 to $700, plus a year-end bonus equal to two or three months’ pay.
But now add in these free, comprehensive employee benefits:

12. Bus transportation: You are picked up and dropped off as needed for your shifts.

13. Arrive at work and eat breakfast! Three meals a day in the onsite cafeteria where workers and management team eat together.

14. Housing: Dormitory rooms are shared by two to six workers, depending on their level of employment, and private apartments for managers. This may be a locally leased, 3-4 bedroom private apartment, or a large dormitory facility housing hundreds of workers campus-style at the work site.

$100 for an MRI Scan

15. Full medical coverage: We note that medical expenses in China are dirt-cheap even without insurance. For example, a normal visit to the hospital costs $2 for a doctor visit, $5 for Zithromax, $10 for X-rays, $10 for various blood tests, $50 for a CT scan and $100 for an MRI. Foreign friends I know have had very satisfactory hernia operations for no more than USD $1500, all inclusive.

16. Paid national holidays three times per year: Chinese Labor Day in May, Moon Festival / Independence Day in October, and Chinese New Year on the lunar calendar sometime in January or February.

17. Paid overtime/triple time: by Chinese law, if you work on an official holiday, you receive three additional paid holidays or triple-time pay.

18. Maternity leave: By law, when a woman gets pregnant in China, she has several weeks’ maternity leave and a job to come back to.
Chinese employment is certainly not perfect, but it is secure and stable. Compare it to a job at Wal-Mart, where an American makes minimum wage, but pays taxes and his or her own rent, transportation costs and meals. The Wal-Mart worker is in much worse shape than a typical Chinese making $500 per month who banks 50% of his paycheck because his living expenses are so low.

19. Public transit: Typically, there are half-a-dozen subways and ten buses at each bus stop throughout the city. In addition, there are tens of thousands of scooters and bicycles along the roads. Bottom line, a typical Chinese does not need a car to get a job.

20. Energy: China has made a heavy commitment to green energy including massive wind farms, solar, natural gas, LPG, and 50 new nuclear plants. The Shanghai taxi company runs its fleet of 50,000 Volkswagens on LPG! Did anyone outside of China know that? For more details on wind, solar and nuclear, read on.

Commitment to Solar Power

21. First, China’s commitment to solar energy is massive. Here’s a relevant excerpt from a recent New York Times column by Thomas Friedman: “Bill Gross, who runs eSolar, a promising California solar-thermal start-up…announced ‘the biggest solar-thermal deal ever. It’s a 2 gigawatt, $5 billion deal to build plants in China using our California-based technology. China is being even more aggressive than the U.S. We applied for a [U.S. Department of Energy] loan for a 92 megawatt project in New Mexico, and in less time than it took them to do stage one of the application review, China signs, approves, and is ready to begin construction this year on a 20 times bigger project!”

Second, the situation is much the same regarding China’s commitment to wind power. Blessed with strong desert winds in Gansu Province, they are building numerous mega-sized wind farms totaling 20 megawatts of output by 2020, and at a third of the costs in the West. According to the Global Wind Energy Council, China has doubled its wind power capacity every year for the past five.
Third, China is going nuclear. Locally, here in tropical Sanya, Hainan Island, I recently met a German who was a project manager in China’s nuclear sector. He told me they were working on the planning project to build 21 more nuclear power plants in the coming decade.

The recent article by Friedman states China plans to build more than 50 nuclear power plants by 2020.

Internal Spending

22. Discretionary consumer spending is on a major upswing. For example, the automobile boom is vanity-driven. But autos are not needed as they are for a job back in the U.S. They are just the newest, greatest, modern addition to the nouveau life they have discovered here, along with iPhones, LCD TV’s and other consumer gizmos. A population of 200,000,000 + Chinese are new members of the middle class, enhancing their lives with American-style vanities of the 1980’s. Remember, they still have almost no credit card debt or mortgages.

Main Street Business

23. Leading Business Indicators: My AmCham Shanghai jobmail messages are loaded with position offers again. My friend who is a veteran corporate-trainer on leadership says corporate budgets had opened back up in the 2nd half of 2009.

Stop wondering how things are in China, because you are receiving this information from a “fly on the wall.” Let the above picture of Chinese reality sink in. Spread the word, and plan accordingly. It is going to be a rough ride, but China is doing fine internally — or, I should say, fine enough.

I am putting together a summit on “The New Reality, 2010” in Los Angeles, so stay tuned for details, including a call for investment-related speakers. Click here and you can listen to my radio show, “Grassroots Talks Money with Mario,” every Monday at 8 p.m. EST (that’s noon, Beijing time).

By Mario Cavolo

www.mariocavolo.com

Disclosure; author has position in SCO 2x inverse oil fund.

© 2010 Copyright Mario Cavolo - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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