Year of the Pig — Your Year to Make Money?

My wife remembers Chinese New Year growing up in Singapore. She’s spent most of her life now in New Zealand and Britain, so manages both cultures with ease. For children and the unmarried, Chinese New Year can be profitable. By custom, you go visit family and relatives. Red envelopes containing cash are given out to the younger people. She remembers visiting an elderly relative who brought out a briefcase stuffed with these red pockets, containing about $20 each. He would dish them out to whoever came by.

Today we start a new Lunar Year — the Year of the Pig. They say 2019 is a good year to make money and to invest, because the pig attracts success.

I hope so. 2018 was a hard year for China and many Asian economies. And here in New Zealand, we need a prospering and open China to trade with. Particularly as our export economy is commodity focused.

 

What is happening with growth in China?

Over the past 30 years, China’s rapid growth has averaged 10% per year. To put this in perspective, New Zealand was termed a ‘rock star’ economy when growth averaged around 3.75% between 2014—16.

The miracle of China’s growth is that it has lifted millions of people out of poverty. It has given rise to the world’s second largest single economy.

 

Playing defence

The Chinese approach is often defensive when it comes to money and investing. By way of example, Xin Lu, contributing to the WiseBread blog, declares ‘Chinese principles’ when it comes to money. These include ‘being frugal is a virtue’, ‘save as much as possible’, ‘pay for things in cash’, ‘always look for a bargain’, ‘your salary is not a secret’, and ‘cash gifts are the best’.

It’s this kind of approach that has helped China become a nation of savers. And a huge net exporter to countries like the US.

The trouble is, long-term, growing domestic economies need people spending freely within them and a constant stream of new innovations. For globalisation to succeed, you need developing countries to grow a massive middle class and become big consumer markets. In other words, you need people to play offense (spend and create) as well as play defence (save and invest).

In his ground-breaking book ‘Civilization: The West and the Rest’, historian Niall Ferguson points out the importance of consumption. Ferguson ’celebrates the West making peace, despite its Christian origins, with purchasing and using enormous quantities of consumption goods’ that have followed leadership in science and discovery.

 

Trump versus China

In Trump’s own words, ‘I am the first president ever to challenge China on trade’.

China’s strategy has been to run a soft currency, enjoy wage arbitrage and export as much as possible while the domestic economy focuses on saving and investment.

It is a mercantilist and predatory strategy. To be fair, it was also practised during the rise of Western powers centuries before.

This creates a situation where China is selling a lot but in relative terms buying little. Coupled with concerns over intellectual property theft, access to the Chinese market by foreign companies and the undeniable control of the Chinese communist party, it’s no surprise that the strategy gets challenged by a leader with a nose for business.

China exports to the US nearly 4 times as much as it buys from the US.

In 2017, the US opened a formal investigation on intellectual property attacks on the US and its allies which had cost the US alone an estimated $600 billion a year in losses.

From early 2018, a raft of tariff measures was applied to China by the US. These began with 30% on solar panels and 20% on washing machines, moving to steel (25%), aluminium (10%) and others.

The Chinese stock market crashed last year, losing more than 30% of its value.

Reported GDP growth has fallen to about 6.5% for now. Some Chinese economists predict it will fall to zero.

The trade war hits China harder than the US because China has more to lose. It is only now with talks on the horizon that the market is starting to warm again. As far as the markets go, they want the certainty of a deal. They don’t want world growth to be threatened further. The talks offer that hope.

But the Chinese economic miracle is also showing troubled signs inside the Middle Kingdom.

Within China there’s concern with the way Chinese savers have played defence at the household level.

 

Chinese savers have something in common with New Zealand investors

Due to a lack of other reliable investment vehicles (such as a stable and deep share market), outsized investment has gone into property.

This means both leverage and risk are growing fast as households borrow more to afford rising property prices. According to the Institute for Advanced Research at Shanghai University of Finance and Economics, China’s household debt has now ‘risen too fast to be safe’.

We know this problem well in New Zealand.

Too much money invested into housing. House prices start coming adrift.

How could this go?

It would be great if China could transition to a large, open consumer economy with people spending. That would create a new market for the world’s goods. It would contribute to global prosperity.

If it cannot, it risks either imploding or following a path of slow decline. An aging population and lack of domestic consumption led to the ‘lost decade’ in Japan during the 1990s when the country went backwards. From 1995 to 2007, the country lost 18% of its economic value (GDP) and real wages fell around 5%.

So, is it worth taking the risk and investing in China exposed assets? I’m not so sure. The inherent structure of China with the communist party involved in most business would surely make the changes needed challenging. And now they face a powerful trade foe in Trump.

 

The successful investor

A successful investor takes the best from all cultures, viewpoints and global opportunities. When diversifying — shares in innovative, productive companies with markets around the world present a strong option for income and growth. But there are always risks, especially on the geopolitical front.

At Money Morning NZ, we’ll continue to explore such opportunities in the Year of the Pig.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand


Simon is a contributor to Money Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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