Photo Credit: btklamf of MF Photos
Investors can't help but talk about China: both sides--pro: will China continue to deliver profitability for investors, or con: will China take a seemingly well-deserved rest to consolidate years of go-go productivity--use parts of the same argument to take a stand.
The Wild West of the East
China's kind of nineteenth century "Gold Rush" flavor has brought lots of foreign direct investment to the nation's industry. There are distinct problems of growing too quickly, tainted accounting, and the sort of back room politics that makes the more civilized Western world shudder. On the basis of this back room talk, plenty of traders have used short sales to capture quick profits during the recent debt-focused past.
Short sales allow traders to borrow shares from a stock lender. Shares on loan are sold at current prices with the goal of repurchasing the shares at a lower price. Capturing the spread of a short-term decline in price is the short seller's goal.
Corporations such as China's Sino Forest Corporation were particularly hard-hit by short sellers in the U.S. stock market. Traders took advantage of the discovery of shoddy accounting practices and captured the stock's decline earlier in 2011. Short sellers captured a $6 billion decline in the company's capitalization.
When we pick apart what China is doing with its own money, the smoke of the back room seems to clear. Almost half of China's GDP is returned for investment. Compared to the United States's approximately 12% of GDP, the people of China (obviously, the people and the government of China) believe in that country's economic future.
The amount of total debt distributed by the Chinese government is open to discussion by both groups. Nobody in the West can actually put a finger on the amount of total debt outstanding. Some financial advisors reflect that the total is actually higher than our own country. Again, perhaps it's important to note the reasons for China's debt raise.
Unlike our own debt debacle, and that of Europe, China's debt has ballooned as investment increases in the country. The country's infrastructure has benefited from China's debt. And consumers save more than a third of what they earn. Compared to our own paltry 5%, China's citizens understand the necessity of saving for leaner or better times. Important to note in the housing boom and bubble are cash real estate sales. About 25% of China's personal residences are purchased with cash.
Naturally, in a high growth economy, there may be problems. One trader described these problems as "digestion": the country is carving out its offshore renminbi market and positioning Hong Kong's role as trade settlement office. In 2011, China's government published "Measures for the Administration of Renminbi Settlement Matters Relating to Foreign Direct Investment" along with the Ministry of Commerce's circular "On Issues Relevant to Cross-Border Direct Investment in Renminbi" (according to Shang Zi Han 2011 Number 889).
As investors ask what's happening there--because the government's certain opaque at best smoke screen leads to questions--the country has actually mounted reserves against its own currency by conserving more than $3 billion plus in other nations' currencies. Lower than low assemblers' salaries in the land make building everything from cars to solar equipment less expensive than other markets. (For example, the average auto worker in China earns less than $200 a month, yet manages to save at least $80 of that amount!
Foreign Direct Investment in China
We've identified the challenges that China's businesses face. Among these, private business investment sometimes finds itself in competition with the Chinese government. In most of these competitions, the Chinese government is the victor. (Foreign investment in innovative technologies is frustrated by the need to compete with the government.) China remains a place to find many kinds of "knock-offs"--from fashion goods to high technology.
Taking heed of global concerns about debt, China's businesses are taking advantage of debt-for-equity swaps when possible. In November 2011, the State Administration of Industry & Commerce (SAIC) published "Measures for the Administration of the Registration of the Debt-for-Equity Swaps of Companies." This new procedure goes into practice in January 2012.
Swapping a business entity's debt (structured loans with due dates to provide interest payments and return of principal) for equity (participation in the economic rise and fall of the business, with no requirement for the return of principal) makes sound economic sense.
Listening to our network of successful financial advisors is an efficient way to take the pulse of any economic and investment arena. Financial advisors are still worried about China (about 221 out of 250), but most (about 81%) predict the country's almost unstoppable expansion through mid-century.