China reported its most recent GDP figures at 6.9% growth versus the officially targeted 7% everybody was expecting. Predictably, the world gasped:
…China’s slowing down
…China’s faking numbers to meet political pressure
…China’s real growth is far less than reported
Now the media’s going to spend the next 72 hours talking about China’s GDP “miss” as if it’s a real number. But I want you to try to pay as little attention to the discussion as you can. It’s a waste of time and hazardous to your finances.
Instead, focus on the data I’m going to share with you today.
For the simple reason that China’s going to fuel the world’s best businesses for decades to come. And, in the process of doing so, create yet another round of millionaires.
I want you to be one of them.
Ignore China at Your Peril
Beating up on China has become a national sport for Western commentators. Sadly, very few have actually set foot in the country, much less spent the decades needed to really get a handle on what’s happening there.
At this point, their arguments are as predictable as they are laughable. Critics charge that the country isn’t democratic, or point out China’s in debt up to its eyeballs. Their economy is slowing, they lie about their statistics, and their “growth” is being propped up to meet political objectives, goes the chorus.
As I pointed out on “Varney & Co.” Monday morning, all of these things make them exactly like us.
Washington openly manipulates every data stream dished out to the American public as gospel. There are seasonable adjustments, cost of living improvements, and constantly changing calculations.
The U.S. government, for example, has changed the way it calculates the Consumer Price Index (CPI) more than 20 times in the past 30 years. Labor stats are calculated six different ways by the Bureau of Labor Statistics. Gross domestic product is deflated or inflated at will depending on “methodological changes” over time. It’s revised incessantly.
The Fed is especially blatant about manipulating data to arrive at the results it wants. For example, Mike Bryan, a senior economist in the Atlanta Fed’s research department, recalled walking to the podium during a 1991 Fed meeting in Cleveland and being greeted with “now it’s time to see what Mike is going to throw out of the CPI this month” prior to a discussion on destabilizing influences that might conflict with the official story. Stephen Roach, who worked for the Fed in the 1970s and is now a Yale faculty member, alleges that the Fed missed the vicious inflationary cycle of the 1970s because it monkeyed around with the CPI by excluding nearly half the CPI data basket from calculations, according to The Economist.
Every nation on earth engages in some form of monetary manipulation. When all else fails, the powers that be will manipulate the data, and that’s as true here as it is in China.
By far though, my favorite “argument” is the notion that China cannot succeed because it’s not a democracy. That’s a very popular line of thinking that, sadly, is grounded in ignorance, not to mention populism.
The Chinese believe government is legitimate when it represents their higher interests. That stems from thousands of years of Confucian thinking and the concept of higher collective interests. Westerners, on the other hand, believe government is legitimate when citizens vote it into power and it reflects their individual interests.
Most Westerners are surprised to learn that China’s actually had a democracy since 1911, when revolution ushered in a constitutional monarchy following a decade of institution-building under the last Manchu court. Like us, Chinese citizens vote for their leaders via a hierarchal system that runs all the way from the local villages to the president and National People’s Congress.
That said, China will almost never adopt our version of democracy. It doesn’t need to.
To be really blunt, nowhere except in our own history books is it written that a society has to be democratic to be capitalist. That’s a convenient construct we created and one China has zero interest in fulfilling. China has proven that it can be communist and capitalist at the same time.
Centralized leadership has been a part of China since 220 BCE when it was first unified by Qin Shi Huang, a point made repeatedly by Singapore’s legendary statesman, the late Lee Kuan Yew. Their Confucian heritage implies a high level of institutional trust, hierarchy, and collectivism. Based loosely on Judeo-Christian ethics and grounded in the intellectual expansion of the Enlightenment, ours implies a wisdom of the masses and the pursuit of individual liberty even at the expense of the collective.
Given the state of our nation today, I could argue with a straight face, as many Americans do, that our “democracy” no longer exists. Instead, it’s deteriorated to become an oligarchy. Well-connected individuals now steer policy against the will of the majority or in their own interests.
That’s why you want to concentrate on the bigger picture.
Most Americans Haven’t Done the Math (but They Should)
Most Americans simply cannot grasp that China has emerged onto the world’s stage. The challenge is not only economic, but ideological in nature.
And it’s eye-opening:
- China’s economy is 25 times bigger now than it was in 1990.
- China’s output was $10.3 trillion dollars last year… up from only $1.9 trillion a decade ago. (America is the only other country to ever hit $10 trillion and reached this landmark in 2000, according to The Economist).
- China created 13.2 million urban jobs last year, up from 12 million in 2007, when it managed a staggering 14.2% growth in GDP.
Ergo, China ISN’T a failing economy.
Rather, it’s becoming much more balanced, and that’s what’s throwing the statistics everybody’s screaming about out of kilter.
For instance, Western analysts once used Chinese electric production and industrial output as key gauges of Chinese economic activity. That made sense because growing nations in the early stages of capitalism need one to produce the other.
However, industrial output and heavy industry drop as services expand and consumption increases. Manipulation or not, consumption is rising and accounted for 51.2% of China’s growth in 2014, a rise of 3% from 2013. It’s logical that heavy production becomes a smaller segment of a growing pie. A slowing China is not a cause for alarm but a sign that the nation continues to develop.
People ask me all the time how this is possible. The answer is deceptively simple.
China now has the world’s largest middle class and it’s more than 600 million people strong. There will be more than 1 billion by 2020.
It’s a numbers game.
China’s middle class will have consumed approximately $41 trillion of goods and services, with annual expenditures rising from only $2 trillion in 2010 to more than $6 trillion just four years from now, according to The Boston Consulting Group. The U.S. GDP was estimated to be $17.94 trillion in mid-2015, to put this in perspective.
Most Westerners simply don’t want to imagine this is happening because it implies a complete loss of economic hegemony. People resist change because they fear the unknown or are unsettled by a loss of security that can be very real or simply imagined. Worst of all, though, China’s rise flies in the face of everything the West believes when it comes to politics, philosophy, and human rights.
Yet, none of these things changes reality.
That’s why, when it comes to investing, you have to take emotion out of the equation. We’ve talked about this many, many times, especially when it comes to China.
The Red Dragon has had the world’s largest GDP for 18 out of the past 20 centuries. They will again as Chinese consumers set their sights on the things we take for granted in the West, including homes, cars, appliances, electronics, travel, and education for their children.
The only decision you have to make is whether your money will be “at the table or on the menu.”
The Best Way to Play This Is to Invest “Because of China” Rather Than in China
Crony capitalism and volatility are part of today’s Chinese experience just like they were during the early days of the U.S. economy. Periodic setbacks resembling the Financial Panic of 1873 or the Panic of 1907 are to be expected, for example.
Even so, the numbers, to paraphrase CNBC personality Jim Cramer, make anybody who’s been skeptical about China look like “total dopes.”
Premium U.S. brands, in particular, continue to do exceptionally well in China, and if you want to really get a handle on what’s happening there, that’s the metric you want to watch. Forget about the outdated industrial data everybody else thinks is important.
Nike Inc. (NYSE: NKE), for example, has reported a 30% year-over-year increase in revenue in Greater China leading to nearly $886 million… despite currency headwinds, a slowdown, and macro-economic issues the critics are screaming about. Earnings there jumped by 51% year over year to $330 million.
Starbucks Corp.’s (Nasdaq: SBUX) China/Asia-Pacific Segment is growing 15% a year despite having a far smaller store footprint that Starbucks’ Americas unit and contributing only about 12% of total operating revenue worldwide. Q3 numbers came in at 11%, up 7% from a year prior. The company’s Starbucks for Life promo campaign tapped into nearly a billion Chinese mobile users and countless expats familiar with the brand when they get there.
Chinese demand helped Apple Inc. (Nasdaq: AAPL) launch a record setting 13 million iPhone 6s, with China accounting for 2.4 million units alone. CEO Tim Cook noted in an email posted by CNBC’s Carl Quintanilla last August that the company continues to experience “strong” growth there. China already accounts for nearly 30% of global sales, and that figure may double in the next five years making China, not the United States, Apple’s most important market.
There are literally dozens of U.S. and European companies selling high margin items into China because a) the markets have too much potential to ignore, and b) Chinese consumers have plenty of cash available.
This wouldn’t be happening if the economy was going to pot.
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