I think I understand the economics and politics of China pretty
well. I was a defense attaché in Myanmar (Burma) in the 1990s and
watched as China supported the vilest form of dictatorship, one
that enslaved its own people in forced labor and pocketed the money
the Chinese paid for the privilege of plundering the natural
resources of Myanmar. I continued to follow China as a geopolitical
analyst in the US Intelligence Community. And I have continued to
research and analyze it from an economic and investment point of
view more recently.
Not long ago I sent a note to my friend and colleague in the
business, Vivian Lewis, the doyenne of international investing and
editor of Global Investing stating why I remain wary of the
"incredible opportunity" in China. I wrote, "I...am a bear in the
China shop. There is much to marvel at, but the air pollution,
water pollution, lack of enough potable water (occasional floods
notwithstanding), failure to regulate, failure to know if the
distant reporting is accurate, climate of fear if plans are not
met, increasing ethnic unrest, and a population that, like all
before them, will increasingly expect real wages for real work, all
conspire to create an economy that will grow, but in fits and
starts. I say they're ready for a fit..."
Clearly, China is a growth engine. But so is that cute little
tiger cub some idiot bought and took home to his ranch that now
roams the property voraciously dining on whatever it chooses. There
is no question that China is a growing teenager. Copper is often a
proxy for growth in that it is used across so many sectors and
industries in construction, infrastructure and manufacturing.
Global copper use has fallen in the past decade, but China's
voracious appetite has compensated for it.
With any commodity, however, it's all about supply and demand.
With demand growing faster than production, China is today the
world's leading importer of copper ores, concentrates and refined
copper. This fact, however, gives me yet another reason, this one
geopolitical, to be wary of buying the "just buy China and sit back
and enjoy the ride" mantra.
China's rising dependence on outside sources render it
vulnerable to supply chain risks, prices beyond its ability to
manipulate, and the possibility of a backlash against their nation
for their heavy-handed strategy of bedding down with the worst of
the world's dictators in order to assure their supply. My
macro-economic and geopolitical concerns are not limited to copper,
but to every commodity every growing nation needs: coal, oil, gas,
copper, iron, other industrial metals, aggregate, etc.
No one really understood the depths of the despair that led to
the Arab Spring before it was in full flower. The despots China has
chosen to deal with could be next. In Zambia and Sudan and the
(insert joke here: "Democratic Republic of the") Congo, the
autocrats who rule by graft, corruption, kickback, favoritism and
raw military might can fall from this earthly vale with one
Internecine warfare is not unknown in such places. Yet China has
placed its future in the hands of these current overlords. In many
cases they have alienated the very people who might have enough
juice to be the next strongman by currying favor with the current
There are the occasional good deals China has made with
developed nations like Canada or truly developing nations like
Brazil, but mostly they are dealing with the unsavory, the
unstable, or the under-developed with poor infrastructure. In
addition to the above, Laos, Afghanistan and Ecuador, three other
resource-rich areas China is courting, do not exactly have the
ability to move product the way a Canada or a Brazil does. And
China often makes the situation worse by insisting on importing
Chinese labor, depriving the locals of even the subsistence jobs
that such investment often brings.
Beijing doesn't have a lot of flexibility or alternatives. As a
latecomer to the developed world, they must accept that other
nations are vying for these same commodities, as well. But the
known reserves in stable nations with steady leadership and good
infrastructure are already pretty well sewn up. Yet the Chinese
political system cannot risk a slowdown that would ignite social
unrest. I don't envy them this task. I take no pleasure in
reporting these facts. But just as I thought "the 21st century
belongs to Japan" hype of the 1980s was well overblown, and said so
at the time, I believe the current "the 21st century belongs to
China" hype is equally overblown.
At our firm, to participate in any growth of China without the
high level of risk we would take if investing there directly, we
simply avoid companies based in China and instead purchase the
shares of natural resource companies in nations whose corporate
governance and ethics we respect.
Companies in the energy sector, particularly the thermal coal
industry and the leaders in liquified natural gas, as well as the
industrial metals giants in copper, steel and coking coal all
provide something the Chinese desperately need, so we can share in
China's growth without ever buying a share of a Chinese company.
[[BHP]], [[VALE]], [[FCX]], [[SCCO]], [[TOT]] and [[BP]] all come
to mind. That's the way we do it. If, on the other hand, you
believe that growth will slow, you might want to consider a
position in [[YXI]], the ProShares Short China 25. I would caution
that we use such inverse funds only for short periods of time. For
the long term, "staying" short simply doesn't pay!
We are currently long TOT and, for the short term only, YXI.
The Fine Print:
As Registered Investment Advisors, we see it as our responsibility
to advise the following: we do not know your personal financial
situation, so the information contained in this communiqué
represents the opinions of the staff of Stanford Wealth Management,
and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an
obvious statement but clearly too often unheeded judging by the
number of investors who buy the current #1 mutual fund only to
watch it plummet next month.
We encourage you to do your own research on individual issues we
recommend for your analysis to see if they might be of value in
your own investing. We take our responsibility to proffer
intelligent commentary seriously, but it should not be assumed that
investing in any securities we are investing in will always be
profitable. We do our best to get it right, and we "eat our own
cooking," but we could be wrong, hence our full disclosure as to
whether we own or are buying the investments we write about.
I am long [[TOT]], [[YXI]].
What Does The Steel Industry Slowdown Mean For Iron