Image Source: Depositphotos
 

My first article titled Making Returns In The Return Of The Roaring Twenties focused on how the US has reverted to its traditional world economic leader having been partly "rescued" by China buying US treasuries in a large way following the 2007/8 great financial crash.

Asia never participated in the Roaring 1920s  as most countries were still suppressed under colonial rule: India under Britain until 1947, Indonesia under the Dutch until 1949 Vietnam under the French until 1954, Malaysia including Singapore under Britain until 1957 with Singapore gaining full independence in 1965.  

Soon after what became known as The Four Asian Tigers - Singapore, Hong Kong, Taiwan, and South Korea began to roar. Japan became the first East Asian country to industrialize; it set a record for the fastest sustained rise in living standards, smashing the 60 years time taken by the U.S. and the 50 years by Britain to reach industrial status. The other Asian dynamos did it even faster with South Korea taking 11 years to double its GDP compared to Japan's 35 years.

The Hidden Kingdoms of China remained hidden from around 200 BC and, until as recently as the 1980s, China was poorer on a per capita basis than Ethiopia and Mali. No one had a refrigerator, few had TVs and even fewer had cars. In 2023 China's vehicle sales accelerated 12% YOY to a record 30.09 million beating a 3% growth target set earlier in the year.

Much was achieved under the last premier, Deng Xiaoping, who set a target that was considered madness and unachievable by Western economic "experts"; quadrupling GDP in 20 years and again in the next 50, thus increasing it sixteen fold by 2050. Ignoring the views of those "experts" China supported those objectives with some simple strategies; learn how to make things (it did not matter whether ethically or otherwise), make them, and sell them. And build infrastructure such as roads, bridges and railways. 

Today China is the factory of the world producing a quarter of the world's manufacturing output, up from a mere 3% in the 1980s. Its GDP grew at 10% per year for three decades, lifting over 700 million people out of poverty. It beat South Korea's world record of 11 years to double GDP, doing it in only 9 years. And Deng's mad, unachievable target to grow GDP sixteen fold in 70 years took 16 years!

In the last 3 years or so that rate of growth has "slowed" to around 5%, causing many of those western "experts" to predict the Chinese economy is crashing. The S&P's chief economist put things into another perspective. In around 2014 he calculated that China's 6.3% GDP growth in money terms would have been equivalent to 14% 5 years earlier.  GDP growth in Britain - the world's fifth largest economy then - would have been 22% instead of around 2%!

I have not seen a recent comparison but the gap has widened with Britain's GDP growing a mere 0.6% in 2023 according to official statistics.

Today doubtful questions are often raised about that 2007/8 world financial crisis rescuer... 
 

China 

"Xīnnián kuàilè" (新年快乐), is Mandarin for wishing all New Year Happiness and will usher in the Chinese the Year of the Dragon on February 10, 2024, western time. 

Legend has it that The Year of the Dragon will welcome authority, prosperity, and good fortune! 

Photo source: South China Morning Post
 

Will the dragon roar this year? 

Much Western talk is of China’s slowdown but its GDP  still grew at over 5% in 2023 and is reckoned to grow by 4-5% in 2024. To put that into another context, China's growth of 4% in monetary terms would mean well over 10% GDP growth for the ever declining UK! 

A recent TalkMarkets article titled Toward China's Soft Rebound by Dr Dan Steinbock paints an excellent overall picture.  

Unlike most other countries China’s growth has been driven by planning with priority given to specific areas. Past plans included infrastructure building and one outcome of that gave China a high speed rail network as large as the rest of the world’s combined. That aided productivity and economic growth hugely. 

In 2024 China’s objectives will take a more scientific route by focusing on new generation IT, biopharma, AI, and low carbon energy production. It led the world with high speed - 5G - internet and China is now leading the world into 6G.   Over the past few years, hundreds of Chinese scientists have switched affiliations from American universities to institutions in China. 

Its people are hard working and entrepreneurial - in a nation that is politically anti-capitalism some twenty million private firms have sprung up within the last thirty years!

The People's Bank of China has injected around Rmb 6.2 trillion ($850 billion) into China's money markets since mid-2023 to stem any slowdown. That is almost one fifth of the total increase in global liquidity last year. 

There is also a puzzle that goes deeper than looking at Confucian cultural values to figure out; as the people have become richer - average wages have more than doubled in the past decade - they have saved even more and are now saving 30% of their rising disposable incomes. That sharply contrasts with the 7% saved by US households. The Chinese government is trying to encourage more consumer spending and if that savings rate dropped to the earlier norm of 20% hundreds of billions of dollars would be spent on goods and services. That would be good for China and the rest of the world. It won’t happen overnight but drip feeding will help keep the 2020s roaring.

Some signs are already good - the Caixin China General Service PMI increased to 52.9 in December 2023 from 51.5 in November, beating market expectations of 51.6 and marked the 12th straight month of growth in services activity and the fastest expansion since July, mainly boosted by a solid rise in new business.  The Caixin China General Manufacturing PMI unexpectedly was at 50.8 in January 2024, the same as December's figure but above market forecasts of 50.6, marking the third straight month of growth in factory activity. 

The property market collapse has pointed to danger but the government is endeavoring to stem it by recently unveiling new property support measures amid concerns about the fallout from Evergrande’s liquidation, providing some support to the equity market. The danger cannot easily be swept away though if one makes a comparison with Japan as many are doing. Japan has never fully recovered from the bursting of its property bubble in the 1990s when the urban residential vacancy rate was 9% - China's today is around 20% and housing prices in China are around 20 times household income compared to 11 times in Japan in the 1990s. Bad demographics and that deflating bubble have created a mountain of bad loans officially estimated to total Rmb 3.2 trillion ($463 billion) 

The bad demographics; China's ageing population - a fifth of the country’s population is 60 or older - should mean new growth sectors that should start to attract more funding. That should provide...
 

Opportunities for investors 

The Shanghai Composite has hit its lowest levels in about four years as economic uncertainties continued to weigh on investor sentiment but stock picking could find good returns.

Those older people will need more healthcare and that could benefit the biggest local biotech and pharma groups, including WuXi Biologics, Shanghai Fosun Pharma, and Sinopharm. These were hurt by an industry slowdown as the Covid-19 effect wore off.  For example, shares of WuXi are down 60% in the past year, and Fosun almost 40%. 

People retiring means a falling labor supply and, as a result, higher wages. China already faced worker shortages in its manufacturing sector as younger workers shun factory jobs despite high unemployment levels among the young. That increases the need for need for automation in the manufacturing sector grows, top local robotics groups, including Siasun Robot & Automation and China Shanghai Step Electric, could be beneficiaries. An excellent article in the South China Morning Post titled China jobs: new energy, automation sectors shine as employment growth belies broader economic downturn tells more. The SCMP also reported that China’s factory activity expanded in January as export orders rose and business confidence hit a 9-month high.

Warren Buffett backed electric vehicle maker (BYD) outsold Tesla in the last quarter of 2023 and is now expanding out of China with a big push into Europe. Given that capacity utilization among Chinese car makers generally is only around 70% that could mean price wars suppressing profits and causing nightmares for all car makers in Europe. 

Having had my fingers badly burned by investing in Chinese companies I do not plan to buy into those but they may prove to be good ones for those who like them and buy. I am sure there are plenty of good companies for Western investors and if readers have experience with good ones please share the names in comments at the end of this article. 

If a picture paints a thousand words then I will conclude on China with this one...

Photo: SMCP

That "small" building on the left of the Ferris wheel is the Mandarin Hotel - the first of today's luxury Mandarin Oriental chain.  It is around 24 floors high and when opened in 1963 was the tallest building in Asia!  60 years later we can see similar scenes in major cities all over China. No other nation has ever developed so fast. Had I not been there at the time of the Mandarin opening and used it as my home in Hong Kong since and seen for myself many huge buildings spring up, I would not have believed it to be possible. 

Other things have happened fast too - China's first high speed rail opened in 2003. As of November 2023 China has world's largest high speed railway network as long as 43,700 kms (27,153 miles) and capable of accommodating high speed trains running at 250 - 350 km/h (186 - 217 mph). Compare that to the US where little has been done except talking about getting things done! "Plans for high-speed rail in the United States date back to the High-Speed Ground Transportation Act of 1965. Various state and federal proposals have followed. Despite being one of the world's first countries to get high-speed trains (the Metroliner service in 1969), it failed to spread. Definitions of what constitutes high-speed rail vary, including a range of speeds over 110 mph (180 km/h) and dedicated rail lines. Inter-city rail with top speeds between 90 and 125 mph (140 and 200 km/h) is sometimes referred to in the United States as higher-speed rail.^[1] Under the most common international definition of high-speed rail (speeds above 155 mph (250 km/h) on newly built lines and speeds above 124 mph (200 km/h) on upgraded lines), Amtrak's Acela is the United States' only true high-speed rail service, reaching 150 mph (240 km/h) over 49.9 mi (80.3 km) of track along the Northeast Corridor."  Quote source: Wikipedia.

49.9 miles compared to 27,153!  Helping build those and much other in China is my pick there...
 

Caterpillar 

Caterpillar (CAT) needs little introduction to most but perhaps few know that it is strong in China. CAT has been in China for more than 45 years,  with a local footprint that includes manufacturing facilities, research and development centers, financial leasing, logistics, and parts centers. 

CAT just published its latest results and they are super...

• Fourth-quarter 2023 sales and revenues up 3%; full-year sales and revenues up 13%
• Fourth-quarter 2023 profit per share of $5.28; adjusted profit per share of $5.23
• Full-year profit per share of $20.12; adjusted profit per share of $21.21
• Strong operating cash flow of $12.9 billion; ended the year with $7.0 billion of enterprise cash
• Returned $7.5 billion to shareholders through share repurchases and dividends in 2023. 

CAT's website tells more. 
 

Final Thoughts for Today 

China may be oversold with the Hong Kong Hang Seng index down 7.5% already this year and China's CSI 300 is 6% lower. The benchmark MSCI China stock index is now down more than 60% from its peak in early 2021 meaning a loss of $1.9 trillion in market capitalisation over that time. 

I believe China will surprise in a positive way in the Year of the Dragon with perhaps the biggest danger being more reshoring in the US, more suppression by the Emperor for Life, President Xi, and Donald Trump if he becomes US president again and slaps big tariffs on Chinese products.

But, even if GDP growth slows to “only” 3% that is still significant in monetary terms given the size of the Chinese economy.  

On the world macro front an excellent article in the Financial Times headed Markets should be buoyed by increased liquidity in 2024 by Michael Howell - MD of Crossborder Capital tells us that "Our research suggests flows of global liquidity accelerated higher into early 2024, expanding by 9 percent at an annual rate from September, led by strong increases in Japan and China.  At the end of 2023, we estimate global liquidity hit $168.2tn, or a 3 percent increase on the previous year. This was led by a 3.8 percent rise in conventional bank credit and a 2.2 percent expansion in shadow banking activity. The eurozone and the UK went against the trend, suffering a fall in liquidity in 2023".  (My emphasis). 

The article concludes with "Put into a cyclical context, global liquidity typically fluctuates over a five- to six-year timespan. Given rising debt levels, that seems to have a growing sway over the conventional business cycle through changes to asset prices and access to funding markets. We do not expect the latest liquidity upswing to peak before late-2025, which should give succor to investors. All the money that is anywhere must be deployed somewhere."

CAT, China, and many other countries and companies could benefit and also benefit from the Return of the  Roaring Twenties in the US  with my points in that linked article being reinforced by the latest job figures upwards blast... the U.S. economy added 355K to nonfarm payrolls in January, swamping the +170K expected. What's more, the U.S. Department of Labor increased its calculation for December job gains to 333K prior from +216K. 

Perhaps as significant, average hourly earnings increased 0.6%, higher than the 0.3% consensus and accelerating from the 0.4% pace in December. On a year-over-year basis, earnings rose 4.5%, compared with 4.1% expected and 4.3% in December (revised from 4.1%).

I end by wishing all "Xīnnián kuàilè" (新年快乐),

More By This Author:

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