China’s Developing Economic System

By: Frank_Holmes

“Global” is part of our company name, and we take it seriously. This week two members of our investment team are in Hong Kong for a CLSA conference, another is just back from China, a fourth will be there later this month and I’ve spent a fair bit of time in Colombia in recent months.

This is not leisure travel, but rather a key part of our investment approach – combining the tacit knowledge acquired from breathing the air, eating the food, seeing projects and meeting with companies with the explicit knowledge gained from the research done at our desks in San Antonio.

Much has been said and written about China as a property bubble on the verge of a messy bursting, but there’s another story out there that makes more sense to us based on our own observations and those of others.

For example, a research note from the highly respected ISI Group on Friday: "Soft landing. Inflation is OK. … 3Q2010 might be an upside surprise… The few high-end (housing) speculators are insignificant. Basic demand is strong from the masses who want more and better housing… Lots of talk in the China media that gets passed off as news."

This map from Credit Suisse shows how China’s East Coast-focused economy is aggressively moving westward into the heartland, where production costs are far less expensive.

Vast new regions of the country are being opened up to the dynamic Chinese economic engine – figures shows the fixed-asset investment (FAI) growth rate in some inland provinces at five times the rate of Beijing and Shanghai. FAI is important because it includes the infrastructure that supports the future growth that stands to raise the living standards for many millions of people, and rising FAI is also highly correlated to commodity demand.

China will bring out its 12th Five-Year Plan next month, and Credit Suisse offers an early peek at some of what it expects to see:
 

• Wage increases to help the consumer sector become a bigger part of the economy;
• New rules to make it easier for rural residents to move to cities in search of opportunity;
• More emphasis on public housing for low-income Chinese;
• Increased investment in alternative energy and incentives to reduce carbon emissions;
• Efforts to diversify the country’s financial sector away from a small number of institutions

The emerging markets growth story being led by China and India remains intact, and this bodes well for gold and commodities. Both countries continue to be focused on spending for infrastructure and to enhance quality of life now while also laying the groundwork for a future of social stability and job opportunities.

India’s GDP accelerated in the second quarter, and China has been performing better than the doomsayers predicted. These two countries – affectionately called “Chindia” – are nearly 40 percent of the world’s population, and they are growing at a much stronger pace than the U.S. or Europe.

By Frank Holmes, CEO , U.S. Global Investors

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

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