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China Profits From the Global Financial Crisis

Economics / China Economy May 01, 2009 - 06:23 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: BEIJING, The People’s Republic of China – For the debt-ridden West, the global financial crisis has been an unmitigated disaster, forcing the so-called developed economies to take on financial commitments that will serve as burdens for years, if not for generations.

For cash-rich China, however, the financial crisis is shaping up to be a major opportunity, with payoffs that will last for decades.

You want proof? The China Council for the Promotion of International Trade (CCPIT) has spent the past four months surveying businesses about the effects of the worldwide credit crisis. And its findings are both fascinating – and instructive. According to the CCPIT, 85% of the businesses it’s surveyed say that their overseas business has suffered as a result of the credit crisis. A mere 7% plan on expanding their output this year.

Yet a whopping 40% of the companies surveyed say they are planning to expand their overseas investments during the next 24 months.

That matches up well with what my contacts have been telling me – as well as what I’ve observed during my visit here: Companies that are planning to expand beyond their home market in China view overseas investments as part of a long-term strategy that will help them improve their corporate profit margins even as they bolster their brand’s stature in the global marketplace.

As I’ve been telling audiences around the world for much of the past year, many of China’s top business executives and government leaders view the credit crisis as a colossal opportunity. They’ve been able to look past the problems the crisis has caused and look to the opportunities the crisis has created because so many companies around the world have been forced to pull back – or have foundered altogether.

As these visionary leaders see it, now is the time to expand aggressively and establish market positions that fulfill current goals even as they enable China to better position itself for future growth.

Clearly, many challenges exist – with product quality and product safety being two of the most visible, given the attention those problems have received here in the United States. But those are really minor details, even though the Western press has made them into a major issue.

If you want to look forward and see how we expect China’s expansionist push to work out over the next few years, you need only consider Japan’s experience as it transformed itself from a defeated and occupied nation and into a manufacturing superpower (before unrelated, speculative excesses cost it its position of global leadership).

People forget that it wasn’t all that long ago that the phrase “Made in Japan” turned a product into a joke. Within a few years, those who had been laughing may well have been weeping over the profit opportunity that they’d missed out on.

China’s going to travel that same path – but to a much bigger payoff. After all, China’s got 10 times the manufacturing strength Japan had, is learning at a far more rapid rate, and has the benefit of being able to learn from the miscues that Japan and the United States have made.

Also at stake is the nature of credit insurance and foreign exchange. People are so focused on deficits of al flavors that they forget China’s still developing these areas, too. As recently as the 1980s, there was very little international credit available. And, comparatively speaking, that’s still the case.

But probably not for long.

If we look forward a few months, I expect China’s overseas investments to accelerate as that country’s capital markets continue to mature. In 2008, cumulative overseas investments reached $130 billion. Overseas investments in non-financial entities soared 64%, reaching $40.6 billion. At that pace, it’s conceivable that China’s investments could grow by an additional $100 billion over the next 24 months.

We’ve already told Money Morning readers to watch as China continues its global shopping spree, spending money to lock in supplies of crude oil, mined minerals, and all sorts of other commodities that will become quite scarce when global growth resumes – as it most certainly will. At a time when most nations (and their corporations) are being forced to retrench, and save money, China and its companies have the cash to create these captive suppliers, which will put it in a great competitive position later on. Just wait and see.

At a time when the West is still handing out Band-Aids, that’s an interesting opportunity to think about, because so few Westerners understand that China’s economy is investment-driven. That lack of understanding is understandable, since our economy is consumption-driven, meaning many investors just don’t even understand the basic concepts at play here, let alone the profit opportunities that emanate from them.

This is an area I address constantly in my presentations about China, since it highlights why this Asian giant – more than any nation on earth right now – is poised to lead the way for the next century or so.

There’s simply so much room for more stimulus-driven growth, with comparatively few of the excesses that have blown up the Western monetary system.
Some people will disagree, and I respect that. However, numbers from a variety of sources seem to suggest that my analysis is right on target.

For instance, according to the Chinese Academy of Social Sciences, China’s economy will advance at an 8.3% pace this year. That’s a prediction, incidentally, that falls smack into the most recent range highlighted by both Standard Chartered Bank PLC and UBS AG (UBS) of 6.8% to 9% in 2009. The latest figures show that approximately 43% of that growth in gross domestic product (GDP) will result from national account expenditures, while consumption will contribute about 36%.

For purposes of comparison, consider that the U.S. economy is driven 70% by consumption and roughly 30% by expenditures.

No wonder China sees the fresh market opportunities flowing out of the global financial crisis.

[Editor's Note: Ten consecutive trades. All profitable. After he launched his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald went 10 for 10, meaning he closed every single one of his first 10 trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, on this new market environment, and check out Fitz-Gerald’s new service, the  Geiger Index.]

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