One of our SpikeTrade members has sent in his second letter about China. It is posted here without editing - Alex
Current Myth:
1. China has $1.1 trillion of foreign reserve, they are strong financial sound country.
Some advisors even suggest change the G20 into G2 – US and China summit.
2. China current $586B stimulus plan, primary on SOE (State Own Enterprise) and infrastructure will jump start China economy.
3. China still have untapped domestic market to grow
4. China is world manufacturing, when export come back, they will be strong again
5. Chinese have the highest saving rate to weather any kinds of economy problem
My observation are China has three major problems that will hinder China becomes a global power:
1. China have ‘low end’, ‘polluted’, export manufacturing, they don’t have ‘value-added’, ‘innovative’ global supply chain.
Result:
a. An US$10 items in Walmart, China only get $1, while labor cost $0.35, material cost $0.65.
b. China college graduate can’t find job --- because ‘low end labor’ don’t need college graduate.
c. The whole countries water, air, resource, environment get deplete by making less than 10% of the whole supply chain.
2. China don’t have proper medical plan, retirement plan, social security
Result:
a. That is the reason why people need to save money … because they are on their own.
b. It cost average US$50 to treat a simple cold in Shanghai for general public.
c. Recently, it cost US$15K to have a simple heart surgery for my friend mother, while they are making US$1K per month.
d. So Chinese saving is NOT for ‘future consumption’… it is for their future life!
e. That is the reason why Government want to pump so much money in SOE --- because SOE pay for retirement and medical Benefit to their current and retired workers … without that… Chinese will be in chaos
f. For the 0.8 billion farmer population, they don’t have any medical or retirement system at all.
3. Don’t have a modern IP-transfer, R&D, due-diligence process --- Resource control by very few people
Result:
a. Last week, China complete their annual People Representative meeting, very little disclosure about how they going to spend the stimulus plan. Most of them will spend on infrastructure, SOE, Medical, etc… Without a transparent auditing, most of the resource will be waste to few people pocket.
b. Unlike US innovation, IP, technology can pass to commercial from military, university to commercial, which create ‘value-add’,
Jobs, new economy … a whole process to protect people rights, funding, financial system, legal system, trust in business Transaction, etc. … China don’t have anything in place.
c. This time, China will support SOE instead of SME, will further hurt its entrepreneurship.
Comment:
1. A country can’t be strong without innovation and value-added service
2. A country can’t be strong without well define law, and process of country resource allocation and direction
Conclusion: (Unless Chinese Government can fundamental change)
1. In short term (2009), we can invest in commodity, infrastructure, energy area
2. In mid-term (2010 – 2020), citizen unrest will getting more frequent … aging people can’t afford for medical treatment, young college kids can’t get their tuition return back … entrepreneur don’t invest in business but speculate in stock and real easte
3. In long term (2020+), major problem in resource allocation result into local province conflict
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Hsin:
ReplyDeleteThanks for your comments about China, which I found very interesting. From a distance, China appears to be coming on so much stronger than what the reality apparently is. Thanks for taking the time to post. I found it very useful.
Thank you very much Hsin.
ReplyDeleteWhenever I look at Mainland China, I remember growing up in the Soviet Union. In a communist regime, a small band of unelected officials makes all the key decisions - and that is an inherently unstable system. They lack 'the wisdom of crowds' that is the strength of a democracy (and the core of our Spike Group). This why the Soviet Union collapsed so rapidly.
Of course, for traders like us, it all comes down to a question - what do we buy and/or sell short :-)
Alex
Hsin,
ReplyDeleteThank you for your insights. You confirm what my daughter, an expert on China's economy and military, tells me, and like Rick, I have trouble getting a grasp that this might be so.
She tells me also that the Chinese military is starting up a U.S. style Reserve Officers Training Corps (ROTC) for college kids, firstly to get them off the streets, and secondly, so they can recruit and hopefully retain talent in their military. It might be easier to do in these times. One of the goals of this program is to develop a cadre of officials who are equipped to handle the expected unrest you mention.
Stocks in Chinese companies have been great, but in light of Hsin's letter, my question to anyone in the Spike Group is: how do we handle any long term, or short term, investments in China going forward? Do technical indicators work in such politically charged market environments?
Clark