Unapologetically Bullish: China Doom & Gloomers Miss the Point

James DiGeorgia

There’s a raging debate among economists and stock market analysts of all stripes as to whether China is really slowing down and about to cause another world economic meltdown like in 2008-’11.

Some pundits point to concern over a China slowdown as the reason the Dow Jones Industrial Average just suffered the 12th-worst January in its entire 118-year history with a -5.3% loss.

China bears point to December’s decline in its GDP growth rate and the slump in the country’s December Purchasing Managers Index (PMI), a key economic indicator for manufacturing that slowed to a six-month low, while the service sector grew at its slowest pace in five years.

Bears are also concerned over China’s "housing bubble." They point to the country’s debt, including huge local government debt. China’s total public and private debt has exploded to more than 200 percent of GDP since 2008.

Worries about Chinese growth may indeed have been behind the recent sell-off in emerging market assets. Many other countries depend on Chinese demand for their raw materials.

However, I don’t buy the argument.

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I’m bullish on China and the world economy. The economic numbers are nowhere near as horrible as the some think.

Although China’s GDP growth slowed to 7.7% in 2013, the official target was 7.5% and even 7.2% is enough to keep the job market stable. In addition, China’s 7.7% GDP growth remains one of the world’s best.

Photo credit: Wikipedia

With regard to China’s supposedly excessive debt, the McKinsey Global Institute says …

"The 10 largest mature economies in the world — Australia, Canada, France, Germany, Italy, Japan, Spain, South Korea, UK and U.S. — had total debt of almost 350% of GDP in 2011.

"If Portugal, Ireland, Italy, Spain and Greece — the countries worst-hit by the debt crisis in Europe — are included, total debt was almost 400% of GDP.

"The United Kingdom and Japan’s total debt as related to GDP both amount to over 500% while the United States — if asset-backed securities, which many analysts include in total debt, are included — U.S. total debt would have been 360%."

Trust me, the updated numbers through 2013 won’t show these debt ratios to be any better. If you just look at the relationship of debt to GDP, you miss the bigger picture. Debt can also express infrastructure and economic growth.

China will transform itself into the world’s largest economy by 2028 — in just 15 years. China’s new President Xi Jinping understands the need for structural and even political reforms to build a broad domestic economy that can grow on domestic demand.

Real estate bubbles are always a worry. Yet in China most investors, speculators and families pay cash for their properties. That makes it unlikely we will see the sort of massacre that easy credit ignited in the U.S. and Europe.

China is at a pivotal point in its economic development. The economic structure is changing as domestic consumption overtakes foreign trade to become a main pillar of economic expansion.

Xi Jinping

President Xi Jinping may not be making economic, environmental and political reforms fast enough for his critics, but he is having tremendous success in developing domestic demand beyond real estate.

For example, hundreds of millions of Chinese are eating more meat and drinking milk imported from farms as distant as Uruguay and Argentina. Domestic production just isn’t meeting the increased demand.

Charter rates for bulk freighters, often a good leading indicator of commodity imports, have stayed strong according to China’s General Administration of Customs.

In many ways, China resembles the post-World War II United States. An explosion of new highways is driving automobile demand higher. China is now the world’s leading car market, with 18 million passenger vehicles sold last year. (Recently Tony Sagami told you how Ford (F) just had one of its best years ever thanks to China.) The nation has more than 2.6 million miles of modern highways, nearly four times the amount in 2000.

Bottom line: I don’t buy the "Doom and Gloom" argument for China. I expect the Chinese economy to grow steadily over the next decade, powered by hundreds of nuclear power plants and fed by commodities from all over the world.

Investors should look at the glass as half-full and getting fuller. I believe investing in China’s tremendous and growing domestic consumer demand is the way to make money from China. Sitting on the sidelines predicting a Chinese economic Armageddon accomplishes nothing.

I’m unapologetically bullish on China, along with key commodities and natural resources — and the many U.S. companies that are expanding into the Asian giant.

Watching Your Chickens,

James DiGeorgia

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