You’ll Never See a Better Moment to Invest in China

Keith Fitz-Gerald May 15, 2015
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We recently talked about how analysts consistently create investing opportunities for you with their wrong-headed calls on individual companies they know very little about (click here to see that again).

But we haven’t talked about what happens when they create ideal entry points in whole sectors… or even entire nations… about which they know even less.

So let’s do that today.

I want to give you a truthful look at what’s happening in the single most underestimated, misunderstood, and perpetually disrespected country on earth: China.

Then we’ll examine why it’s creating an ideal moment to invest, how savvy investors are jumping in anyway, and what steps you can take to join them (including three investments you can make today).

Here’s everything you need to know…

Analysts Have Helped Create a $28.3 Billion Disconnect in World Markets

The latest “paranoid punditry” is coming from the head of emerging markets and global macro at Morgan Stanley Investment Management, Ruchir Sharma.

Speaking this week at the Global Private Equity Conference in Washington, DC, he said he’s of the opinion that the worst of the Chinese economic slowdown is still ahead because of the nation’s debt. Specifically, he noted that whenever a country increases its debt to GDP sharply over five years, there’s a “70% chance of a financial crisis and 100% chance of a major economic slowdown,” as reported by Yahoo! Finance. The implication, of course, is that China’s going to see the same.

On China: Use History as Your Guide

Doomsday predictions related to China are nothing new. They’ve been spread for years by companies and individuals commanding very large audiences.

The New York Times warned readers on January 18, 2004, that China “may be in a bubble now, especially on the investment side of the economy.” Since then, China’s GDP has surged by 297%.

That same year, the International Finance Corporation, which is the main investing arm of The World Bank, announced it would stop financing China’s manufacturing sector, summarily declaring that it was hopelessly over-invested. In fact, China’s manufacturing sector proved to be so robust that it overtook the U.S. as the world’s leading manufacturer… not bad for a country that ranked below Italy in 1980!

Famed short seller Jim Chanos, who’s made huge waves in the national media for years about China’s looming meltdown, won’t give up the ghost. On April 3, 2015, he noted on CNBC that China’s panicking in the face of sluggish growth.

Hardly.

But that’s fine, because it means bigger profits for you.

Respectfully, I really wish guys like Sharma would crawl into a hole somewhere. Their version of doom and gloom just isn’t true. China’s latest market rally began in Q2/2014 and tacked on 128% through the end of April.

Sharma is essentially making the same argument that many others have made for the last 40 years… and for 40 years they’ve been dead wrong.

Here’s where China’s got key advantages.

1) Growth

So what if China’s growth falls from 7% to 5%…? The United States will be lucky to do just 2% after spending trillions of dollars! You’re still talking about a country with a growth rate that’s double or even triple our own. Any central banker around the world will love to have those numbers.

Even if you can’t mentally get past that point about growth – and lot of people can’t for a variety of reasons – take a look at this chart.

2) Capital

China’s got around $4 trillion USD in reserve. That means Beijing can recapitalize China’s banking system several times over and still have change left. (Meanwhile, the United States is $220 trillion in the hole.)

There’s no question China can “term out” the debt and take a page from our politicians by kicking the can down the road – a point Robert Petty of Clearwater Capital Partners made that echoes my own in response to Sharma’s observations.

Keep the numbers you hear in perspective. For example, the State Administration of Foreign Exchange (SAFE) just reported that $28.3 billion in capital fled China’s economy last month… at a time when the Chinese economy was growing by 7%. Western economists flipped.

To put that in context, the U.S. economy saw $4.1 billion in capital flow across its borders last month in foreign investment, despite a much more anemic growth rate of 0.2%… exactly 1/35th of China’s current growth rate. Capital expansion and cross-border movement is a natural byproduct of growth.

The key thought here is that if China’s government wants to continue the growth it needs – and it does – China will have to develop new trading relationships with new trading partners. That’s why it’s pushing into Africa, the Middle East, and even Europe.

3) Demographics

Don’t forget that China is a country in transition. It is moving from a manufacturing base to one that’s focused on domestic consumption (much the way the United States did 100 years ago). Liberalizing the economy is only a small part of the equation. A lot of money has yet to flow to education, medical care, insurance, and even social works.

While we’re at it, don’t forget we’re talking about an economy powered by 1.3 billion people using a currency that’s still not fully convertible and which is unencumbered by the “nanny state” spending of the United States, Europe, and Japan.

Hundreds of millions of Chinese consumers are expected to join the middle class by the year 2020 – that means hundreds of millions more people who will be able to afford cars, smartphones, and all manner of products they couldn’t afford before. A report from McKinsey projects that China’s upper middle class will account for 54% of urban households. In 2012, that number was just 14%.

This is the power of Demographics which is exactly why it’s one of six Unstoppable Trends and, specifically, why China’s at the heart of it.

It can break a nation, as is happening in Japan, which has the highest number of elderly per capita on the planet. Or it can lift entire nations to new heights, like the Baby Boomer demographic did for America post-World War II. China happens to be on the right side of the Trend at the moment.

4) Economy

And, finally, China’s still a centralized economy. While Western economists may not like it, this gives China a measure of strength we don’t have in our own “free” markets.

The irony was not lost on Warren Buffett, who noted at the most recent Berkshire Hathaway shareholder meeting that “investors should have faith in China.”

I couldn’t agree more.

At the end of the day, China will play an important role in your financial future whether you like it or not. CEOs know that in order to achieve the growth they need to keep investors happy, they’ll have to find a way to work with the Red Dragon, even if our political leaders don’t… or can’t.

How to Invest In China

My favorite “in” China stock is Alibaba Group Holdings Inc. (NYSE:BABA).

The company dominates the e-commerce industry in China (which is expected to grow by 32% this year, to total $562.6 billion in sales). The consulting firm Forrester says that the Chinese e-commerce market could grow to $1 trillion by 2020 – so Alibaba has enormous long-term potential if it can just retain, never mind grow, its current market share.

And it shows no sign of slowing down its aggressive acquisitions and partnering strategy that ties its fate ever more closely to China’s rise. Just yesterday, for example, Alibaba announced a strategic investment in the logistics company YTO Express, which already services 2,300 Chinese cities and is one of only three companies in the country that is licensed for aviation logistics.

If ETFs are more your speed, consider the Guggenheim Small Cap China ETF (NYSEArca:HAO). It’s a passive exchange-traded fund designed to replicate the performance of the AlphaShares China Small Cap Index. That gives it exposure to a wide variety of small-cap Chinese companies that would otherwise be off limits to Western investors including everything from basic materials to technology to healthcare, consumer cyclicals, and even communication services. HAO has returned 28.79% since I recommended it to Money Map Report subscribers eight months ago and remains a great choice today.

How to Invest Because Of China

If you just can’t stomach the thought of an “in” country investment, then consider investing “because” of China.

Bar none, my favorite in this arena is Apple Inc. (NasdaqGS:AAPL).

CEO Tim Cook makes no bones about the role China plays in Apple’s future noting late last year that he plans to grow the number of Apple stores in China by 166% in 2015. “When I look at China,” Cook said, “I see an enormous market where there are more people graduating into the middle class than any nation on Earth in history.”

What’s more, Apple isn’t confining its investments in China to the smartphone market. The company announced plans for a new solar installation project in China last month that will allow it to power all of Apple’s 40 stores and offices in China. Given how seriously Beijing has signaled its intention to move away from fossil fuel dependency and turn to green energy in recent years, Apple’s investment could lay the groundwork for rapid expansion in a centralized economy that increasingly dictates that new facilities meet stringent energy requirements. Not to mention an entirely new revenue stream that’s not yet being contemplated here in the United States.

Perhaps most importantly, though, Apple has an additional reason to invest in China that most other companies don’t, and it’s related to the Demographics Trend. China surpassed the U.S. as Apple’s biggest iPhone market in April when revenue for the second fiscal quarter in the region surged by 70%, so $16.8 billion.

That’s a level of growth that will continue as hundreds of millions of Chinese citizens win entry to the middle class and continue to spike demand. And like any good CEO, Cook knows to follow the money.

So do we.

Best regards for great investing,

Keith Fitz-Gerald

44 Responses to You’ll Never See a Better Moment to Invest in China

  1. Gene Vaughn says:

    THANKS, GOOD REPORT. I’M ALREADY IN THOSE COMPANIES.

    GENE VAUGHN

    • Keith says:

      Thanks for the kind words, Gene.

      Let me know how you make out. I think they’re going to have an incredible run that’s just getting started rather than coming to a close.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Eric Jordan says:

    Ecellent analysis. I have visited China since 1992 and believe as you do it has been underestimated since it started its free economy in the 1970s. Most western analysis is full of patriotic nonsense instead of comparison of facts.

    ERic Jordn

    • Keith says:

      Hi Eric.

      Thanks for the kind words. Your choice of words – patriotic nonsense – is excellent and one that pretty much hits the nail on the head. Well put. I’ll take the facts any day, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Dr Moh A Aziz says:

    E xcellent assessment of the situation in China. I have a strong investment position on China Stocks. Banks ‘analysts tend to take positions relevant to their own strategy and interests without careful analysis of the trends and the overall economic atmosphere. Thank you Dr FitzGerald.

    • Keith says:

      Thank you for the kind words, Dr. Aziz! You make some excellent points.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Jan van de Linde says:

    Thank you, Sir! It needed to be said. I fully agree.

    • Keith says:

      Thanks Jan!

      Many times it’s the irony inherent in biased analysis that leads us to great opportunity, especially when we recognize things others don’t.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Stephen W Lee says:

    I read with interest you China report as well as Shah Gilani’s report to be wary of China. Is it that your perspective and Shah’s differ in the approach to China investments or is the objective different? I own China shares and at first was worried when I read Shah’s report then confused when I read your report. Invest now or be wary? I would appreciate your comments. thanks for a great letter.
    Stephen

    • Keith says:

      Hello Stephen.

      Shah and I agree on many issues but this isn’t one of them. I think the best thing to do is take look at how your perceive the potential and the time frame you’ve attached to it. Longer term it’s very hard to go wrong in China given the economic growth over the last 2,000 years, Sure there are spurts and starts, but in the scheme of things this is no different from what much of Europe or even United States history reflects. And, still…the stock markets went up because they reflect the underlying growth.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. Suzanne David says:

    I am very interested in learning how to invest but have no idea how. I will need to start small and advance. I sucrose to Money Map Press in hopes to learn and actually participate. It would be great if I could get some direction. Thanks so much. Suzanne David

    • Keith says:

      Hello Suzanne and welcome!

      I think you’ve made a great start by becoming part of the Total Wealth Family. And, I’m honored you’re here. We’ve got a lot of resources so please feel free to explore, read along, and, of course, comment, too. That way we all share in your journey and can help each other.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  7. Rob Zundel says:

    This is an interesting dichotomy from the piece your associate (Shah Gilani) posted just hours ago. He notes that as of mid-2014 the cumulative China debt (government, corporate, and household) was at $28T (trillion). Recently they stimulated their economy by lowering reserve requirements at banks. Now those same banks are repackaging that debt into “asset backed securities” to be resold as investments. Shah called it, “China is playing the ‘derivatives of mass destruction’ game”. Remember how that worked out for west in 2008/2009? Also, quoting him, “China is blowing … it’s own bubble … its eventual bursting … will be global and the fallout nuclear.”

    How far will their $4T in USD reserves go when the Chinese banking dominoes start to topple under the weight of $28T in bad debts? I don’t see how $4T will allow them to recapitalize “several times over” banks that are holding some leveraged multiple of $28T in bad debts.

    I also question how beneficial it will be to Chinese growth when their currency does become fully convertible. It may instead force the RMB value to float to a fair market level, which in turn could make exporting their manufactured goods expensive, in turn killing growth.

    Elsewhere today I read that the supply of rural worker moving to the cities to provide cheap labor has slowed. Mostly what is left are the older farmers. The old “one child policy” is turning the demographics from a boon to a burden.

    Finally, I also have to question whether having a “centrally planned” economy is really the advantage you imply it to be. What if their central planners are really just encouraging a lot of dumb investments (e.g., whole ‘ghost cities’ that no one will ever be able to buy)? That same kind of real-estate over building, repackaged as ‘mortgage backed securities’ and ‘complex derivative options’ caused the 2008 financial crisis, which was only averted because the FED was able to ‘print money’ to recapitalized the banks that were about to fail. Aren’t the Chinese central planners just doing the same thing? Except the RMB is NOT the world reserve currency (yet), so they likely won’t be able to print their way out. Instead, it seems more likely that when “the music stops” (as Shah put it), they’ll start selling US and European assets and equities to cover their losses, and the meltdown will become global.

    There is a lot about this article that just doesn’t add up for me.

    • Keith says:

      Hello Rob and thanks very much for the obviously well thought out and coherent response. I respect your opinion tremendously.

      Having spent nearly 30 years in the Asian Rim including a lot of time in Mainland China, I’ve studied that nation carefully. The potential it harbors is purely a numbers game. Western metrics don’t apply. It’s had the world’s largest GDP for 18 out of the last 20 centuries and will again soon.

      The only choice westerners need to make is whether to be at the table or on the menu.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Scott Bohbrink says:

    I’ve been very happy the past 8 months with ASHR–large caps!

  9. Roelof says:

    Your analysis is right on!
    So many people underestimate (and certainly don’t understand) China and how this country is changing very fast.
    There are of course things to worry about, like freedom of speech and internet suppression, but that does not hinder economic development.
    Mr. Sharma may have a hidden agenda (he is probably from India originally, and many Indians don’t like China) or he just does not understand what is going on in China.
    I’m living in China since over 10 years and I have seen the transition from a farmer oriented country to an industrialized country and now developing the services part as well. Millions of people have been lifted from poverty, farmers have migrated to cities and the middle class is booming. Quality of products is improving (sales of Chinese cars going up, while foreign cars have a difficult time). A side effect of the anti-corruption measures from president Xi Jinping is that the super rich are very carefull in buying expensive articles like Ferrari, Masserati, Bugatti, expensive watches, and other luxury articles, because they are afraid to be caught. Also the high-end restaurant business is suffering, because it is no longer possible to orgainize parties and dinners on the expence of the government. Large componies (mostly still state owned are following this policy as well).
    I am living in a very exciting world and I am enjoying it very much.
    I’am very careful in investing in pure Chinese companies , because I don’t trust financial reporting (I know that they all have double set of books) . Therefore I am only looking at EFT’s and large-cap companies.

    • Keith says:

      Thanks for such a great note Roelof. I’d be interesting to compare experiences some time. Perhaps we can meet when I am next in China.

      ETF’s and large caps are definitely an advantage for the reasons you point out. Despite the rapid improvement in reporting over there, tricky books are still very real. So transparency is key.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  10. yngso says:

    Nowadays there’s so much talk about emerging markets like India, Afrida etc. Thanks for reminding us that there’s plenty of life left in the ol’ dragon yet.

  11. RJ says:

    Excellent article.

    James Rickards has a chapter in his book, “The Death of Money,” about China. His opinion is that China is in for a “hard fall.”

    While he may differ about China’s future economic prowess, he does agree that consumption will continue to grow, and that they do have the liquidity to weather an internal banking crisis.

    Contrast that with the U.S., where the “too-big-to-fail” banks have only become bigger and more leveraged since 2008, an anemic economy, low labor participation rate, and uncertainty about the business climate, regulation, taxes, not to mention our domestic and foreign policy.

    I find it interesting that you mention “fossil fuels.” Are we really producing all of the world’s oil from fossilized carcases? There are other opinions.

    • Keith says:

      Thanks RJ.

      Jim’s book is very interesting and while he and I agree on several key points, we differ, too as you have pointed out. Good point on the fossil fuels and a good reminder, as well.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  12. Ros Merchan says:

    We sometimes have a rural mentality . Our knowledge of the outside world is mostly cordoned by CNN . This appears to be our shaded window of the outside world . So when some of us has the opportunity to travel outside , we’re surprised by what we see as completely different from what we hear back home .

    • Keith says:

      Well said, Ros! Only 36% of Americans have a valid passport according to the State Department. Travel is a really eye opener and I wish our nation did more of it. Perhaps the views on many subjects would change for the better.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  13. bob says:

    Good article, it is refreshing to see some reality.

    Compare Chinese GDP to any ‘developed’ country and the result is obvious. China must slow simply due to the Law of Large Numbers, but even while slowing it still outpaces all comparable countries.

    Government stimulus is aimed at building infrastructure rather than trying to project military power. Military power degrades while infrastructure generates growth.

    Chinese banks are constantly denigrated, yet it is US and European banks who are still paying massive fines for market rigging and other illegal activities which seem to be never ending so which is safer?

    • RJ says:

      I disagree about China’s “military power”. They are investing heavily in their military prowess, as is Russia. China recently launched their first aircraft carrier, and their submarine fleet now outnumbers the U.S.

      Have you forgotten that twice their subs surfaced, undetected, in the midst of our carrier fleet? Moreover, if you understood China’s history and culture, it is clearly evident that they feel “destined” to rise as the preeminent world power.

      Have you also forgotten Maj. Gen. Zhu Chengh statement in 2005, threatening to use nuclear weapons to destroy hundreds of U.S. cities?

      Or was that just hot air?

      China and Russia are not near rivaling U.S. military power. That will change over the next 10 years.

    • Keith says:

      That’s a good series of points, Bob. Thanks for taking the time to make them. I suppose safe is a relative question not to mention term. I’m constantly researching both groups and for now, can only answer “both” but for very different reasons. Stay tuned.

      Best regards and thanks, as always for being part of the Total Wealth Family, Keith 🙂

  14. Fallingman says:

    When you characterize someone else’s analysis with epithets … “doom and gloom” … “paranoid punditry” … you don’t add anything to the discussion. Were he to write an article disparaging your viewpoint as “permabulish” or “in denial,” would you like that? Would it be accurate? Fair?

    Can someone have a profoundly negative opinion on anything without being a doom and gloomer? I ask, because when I warned people about the dot com bubble, I was a doom and gloomer. When I warned about the housing bubble, again, I was a doom and gloomer. When I suggested people buy gold and silver and short the dollar in February of 2002, I was called a doom and gloomer. As you might imagine, I didn’t appreciate the slur. And looky there, it turns out I was right every time. We’ll see who’s right about China. I’m agnostic. I don’t know, but I wouldn’t be so sure it’s gonna be you.

    “Respectfully?” Really? You respectfully wish this guy would crawl in a hole somewhere. Doesn’t sound very respectful.

    Look, I don’t know this guy Sharma, but I know Morgan Stanley. They’re a sleazepit and I don’t say that respectfully. I say it with utter contempt. But notice I didn’t PRETEND to be polite.

    • Keith says:

      Hi Fallingman.

      As usual, you make some excellent points and they’re well taken. I remember being laughed out of more than a few board rooms in late 1999 when I said the markets were in trouble and again in late 2007. Birds of a feather…

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  15. Mike Cooper says:

    Last report I read, China’s exports were down, but China’s imports were down more. To the “experts”, that signals a slowdown. To people like me who have been traveling to China several times a year since the mid 80’s, those experts better subscribe to Keith’s service, because he has NAILED IT! It’s all about domestic consumption – why bother with all the requirements the US and European customers are forcing on their suppliers out of the fear of being blackmailed by some NGO out to generate fund raising issues when you can sell all you can produce locally. China, both intentionally and unintentionally, seriously under reports their GDP. How can they include what is made and sold without government knowledge? Factories in the south struggle now to get workers from other areas – why – because there are many more opportunities in those areas now. Just another indicator of how domestic consumption is growing.

    • Keith says:

      Thanks for the kind words, Mike. They are tremendously appreciated.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  16. Peter Astor says:

    I bought BABA in November 2014 after it had reached 108, with great expectations it would carry on. I was stopped out at 88 in Feb 2015. It has been in a tight range of 80-88 ever since. Where’s the growth?

    • Keith says:

      Keep up the faith…sometimes these things take a while to get rolling. Price simply does not yet reflect underlying data and earnings (which remain at levels Google, Amazon and Ebay would love to have)…but it always does eventually.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  17. Geraldina says:

    I am waiting to se what MSCI Emerging Mrkts is going to decide on June 9th.

  18. OSVALDO C. ARENAS MD says:

    THANKS for your WONDERFUL GOOD REPORT. I visited China in 1990 :The age of the bicycles. Return in 1994, the age of the scouters and motorcycles. By 1998 a few private cars were seen. I started my investments in China and Hong Kong. Chinese Year 2000 was received with glory and 2008 was the year of rush hours of private cars in the superhighways of Shanghai. China was unstoppable despite that USA Media tried to keep blind eyes and stockbrokers talk of the bubble and economy slowdown. For a moment y reduced my investments which proved to be an error. While USA eclipse itself in the horizon of empires, China and Russia unite with the rest of Asia in the Shanghai Cooperative Organization and remove the Dollar from its old values. This is the year of the Dragon.

  19. Rich says:

    ENJOY YOUR COMMENTS AND YOUR ANALYSIS AND AGREE…KEEP UP THE GOOD WORK

  20. Rich says:

    AGREE WITH YOUR ANALYSIS

  21. Sam Lasley says:

    I bought 300 China Mobile CHL last week, and have a “limit” GTC order in on BABA at the moment.

  22. Lenn G says:

    What”s your opinion re: FXI and/or ASHR? Should, Hong Kong ,be the focus ?? THANKS FOR THE ARTICLE ,!!

  23. Rowland says:

    My available investment is modest and 2% is $300. Many of your recommendations have stock prices already at $100 allowing me to buy only 3 shares. Gains are going to be slow and modest as well even with triple digits.
    Should I make these plays or wait for those that allow buys of 50 to 100 shares for more substantial gains I am not greedy, but I do have limited years left.

  24. James says:

    This is very timely article. Thank you very much. It encourages buying Chinese storcks. My mind is on China after watching a video yesterday by Steve Sjuggerud of Stansberry & Associates on reserve currencies.

    The International Monetary Fund (IMF) is almost certain to add the yuan to the special drawing rights in October 2015 and it is going to shake the global economy to the benefit of China. This single cataclysmic event is going to boost Chinese stocks.

    Buy Chinese stocks. It is a no brainer!

  25. ELLIS PASCUAL says:

    When will BABA be spun off Yahoo?

  26. J. M says:

    I fully agree with your analysis. One question: you haven’t mentioned the “Hindenberg Omen” for awhile. Does your current reading of that add further emphasis to looking abroad?

  27. Maureen Sheard says:

    I love what I leard with Keith and want 2 buy some BABA. I want 2 continue getting your emails and reading comments from fellow investors. Keep up your Passion and information.

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