China 2009: Can Dr. Keynes Turn the Ox into a Bull?
Investment Summary
China is a realm of Ying and Yang. It is a Keynesian nation with
banking system, an education system of socialistic dogma breeding a new generation of capitalists
of migrant workers, and piles of exports sating foreign wants but ignoring the hinterland’s needs. In the current global crisis, the issues with
these contrasts have become increasingly acute. We believe that in the Year the Ox, China is likely to confound both the western Cassandras
and communist Pollyannas. We have put our thoughts together about China in 2009 in this report.
Money Is Still Tight; Further Slowdown Ahead.
forecasting and leading the real economy by about six months, are still declining. A further slowdown is thus likely in the near term. To gain an
edge over these LEIs, we turn to monetary conditions in terms of
indicator of monetary conditions, which leads the LEI and the market by about six months, is low, albeit still higher than the low
the 2001 U.S. recession and the 2004 monetary tightening. While some recent statistics have been encouraging, we will
confirming evidence of a decisive upturn in money to become unrelentingly bullish.
Still a Large Continental Economy; A Soft Landing Likely.
fundamentally disagree. Net exports have never been the determining driver of China’s economic growth. For instance, net exports
contributed only ~20% of GDP growth in 2007, one of the most glorious years of Chinese exports. China’s growth in the past 30
driven by gross capital formation and domestic final consumption. As such, the country is still a large continental economy, as
some small open Asian economies vulnerable to external shocks. With bold and swift fiscal stimulus, a soft landing is a
China and the Paradox of Deleveraging. China has no
government to corporations down to Chinese consumers, everyone has been saving hard during
government budget has improved substantially since the Asian Crisis
corporations are double what they were a decade ago. And domestic saving depos
depressed due to liquidity issues of the asset holders, rather than the fundamentals of these assets, buying opportunities sh
Valuation Has Cheapened Substantially, but Not Yet
from its peak. But we would still be hesitant to call it “the cheapest on record.” Pundits have not stared back into the shor
financial markets far enough. Current valuations are
are at a premium to other emerging markets. Further,
during previous down cycles. Current valuation levels portend a small positive forward return, with a win ratio slightly bett
Three Investment Themes for 2009. (1) Follow the Yangtze
than their Tier-1 comrades. They are also at the center
cities dwell on the upstream of the Yangtze. For this theme, we wo
sectors that should benefit from the stimulus package, such
buyers of FUQI and CFSG. (3) Follow the History
bubbles tend to bottom out after a 65-70% correction in the ensuing two to three years post peak. For this,
FXI.
Most Significant Risks: Social Unrest, an Ailing Property Market and Policy Missteps.
5,000 years of China’s history, turns of dynasties and revolutions tend to find their roots in the discontent of the hoi poll
has risen from the decade-long economic restructuring that
ailing and is concerning, but the financial property market is nearing a bottom
policy missteps, however, is harder to quantify and cannot be discounted. That said, the government has
face of the crisis. Some of the stimulus money will inevitably go to waste
making good decisions. It is about choosing between a bad and a very bad situation
provincial laissez faire economies, a horde of compulsive savers
capitalists, cities of skyscrapers shadowing the sheds
cute. Both the OECD leading economic indicator (LEI) and MSCI China, with a fine record of
the money multiplier, velocity and price for early cues. Our proprietary
ator Pundits point to the dramatic slowdown in exports and argue for a hard landing. We
agree. ven not geared up in the past few “go-go” years of the global liquidity bubble. Instead, from the
the good times. Consequently, the
antially and has turned into a small surplus. Profitability and liquidity at Chinese
deposits are ~70% of GDP. As such, if the price of Chinese assets is
Compelling; Earnings Estimates Must Come Down. Valuation has cheapened substantially
s still well above the levels seen during the depths of the Asian Crisis and the banking crisis
we believe earnings estimates are still too high, especially compared with th
Upstream. Tier-2/3 cities tended to be more resilient during previous slowdowns
centerpiece of the government’s “Go West” strategy and its 11
would be buyers of NTES and CHLN. (2) Follow the Government
as infrastructure, consumption, education, and healthcare
ory. We have investigated 21 bubbles in the 150-year history of global financial markets. Most
we would be buyers of
A slowdown augurs a surge in unemployment. In the
structuring shattered over 50 million iron rice bowls. The physical property market is still
bottom, in our view. The possibility of a trade war because of potential
taken swift and decisive action
waste. But that is not a reason for inaction. After all, leadership is not about
situation.
1

OVERVIEW
China is a realm of Ying and Yang. It is a Keynesian nation with provincial laissez faire economies, a horde
of compulsive savers with a fledgling banking system, an education system of socialistic dogma breeding
a new generation of capitalists, cities of skyscrapers shadowing the sheds of migrant workers, and piles
of exports sating foreign wants but ignoring the hinterland’s needs. In the current global crisis, the issues
with these contrasts have become increasingly acute. We believe the outlook on the nation’s economy is
likely to look grimmer in the near term.
Many are pointing fingers at the dramatic slowdown in the export sector as the principal culprit. We
fundamentally disagree. China is still a large continental economy, with economic growth primarily
driven by domestic final consumption and gross capital formation. Net exports only contributed about
20% of the nation’s economic growth in 2007, one of the most glorious years for Chinese exports. As
such, net exports are an important, but not determining factor of the nation’s economic growth. This
factor differentiates China from those small open Asian economies vulnerable to external shocks.
The world is facing a long and hard deleveraging cycle. China is no exception. But remember that China’s
government, corporations and citizens have been saving hard during the past few “go-go” years of the
global liquidity bubble. The government’s budget has improved substantially; liquidity and profitability at
Chinese corporations are double what they were during the Asian Crisis; and the Chinese consumer has
lived up to its fame of being the champion of saving. Back in the 1950s, an average Chinese savings
account had less than two yuan in it. Today, domestic saving deposits are close to 70% of China’s annual
GDP. Of course, investment in China has been strong—remember that fundamental equation between
savings and investments? Therefore, if the price of Chinese assets is depressed due to the asset owners’
leverage issues, rather than the fundamentals of these assets, buying opportunities should emerge.
That said, valuation on investable China is not yet compelling, especially relative to the other emerging
markets, although it has cheapened substantially. We believe earnings estimates are still too high and
need to come down. And we need further confirmation that liquidity conditions in the economy have
genuinely improved before becoming unrelentingly bullish.
There are also daunting challenges. Social unrest as a consequence of surging unemployment is a clear
and present danger. But China has risen from the decade-long economic restructuring that shattered
over 50 million iron rice bowls. The physical property market is still ailing and is concerning, but the
financial property market is nearing a bottom, in our view. Deflation is also likely, but it is an easier
enemy to fight than inflation—just print money. The Chinese government has taken swift and decisive
action in the face of the crisis. Some of the stimulus money will inevitably go to waste. But that is not a
reason for inaction. After all, leadership is not about making good decisions. It is about choosing
between a bad and a very bad situation. The possibility of a trade war because of potential policy
missteps, however, is harder to quantify and cannot be discounted.
In 2009, China is likely to confound both the western Cassandras and the communist Pollyannas. So in
this extraordinary year we will remember one Keynesian adage, watch two indicators and follow three
investment themes: (1) remember that the social object of skilled investment should be to defeat the
dark forces of time and ignorance which envelope our future; (2) watch the country’s monetary
conditions, an early leading indicator of the stock market, and valuation; (3) follow the Yangtze upstream
to look for opportunities with strong exposure to the more resilient Tier-2/3 cities; (4) follow the
government and buy into the likely beneficiaries of its bold stimulus plans; and (5) follow the course of
history to find value in the post-bubble wreckage.
We wish you a bullish Year of the Ox!

[此贴子已经被作者于2009-2-1 1:08:28编辑过]