Chinese stocks have been on a relative tear in years past, but in 2010, the country may prove a riskier bet. As such, investors might want to exercise caution before buying shares of Chinese companies like CNOOC
Uri Landesman, head of global growth at ING
After a 67% run from March 2009 through last August, the Shanghai index has taken a beating recently on concerns about overextended lending and possible property bubbles in China. Recently, Fitch Ratings downgraded credit ratings on two of China’s midsize banks -- one of which used to be China’s most well-capitalized bank.
In response, Chinese officials have taken steps to rein in lending. “I think the Chinese economy was overheating again,” Landesman says, “which it has a tendency to do every couple of years. So what we’re seeing is a logical response to that.”
Still, Landesman says the Shanghai index could have further to fall this year. “The Chinese economy is like an aircraft carrier,” he says. “Turning and stopping an aircraft carrier is very difficult, and so I think any time they’re going through that process, I would stay on the sidelines until you’re sure that the whole thing is recovered again -- even if you miss the first part of the move up.”
Though Landesman is nervous about the short term, he says he still believes in the country’s long-term story. Here are some edited excerpts from our conversation:
Jennifer Schonberger: Will structural problems in Europe and the U.S. temper China’s growth, given that China depends so heavily on its export economy?
Uri Landesman: ... China still has a lot of exports from the U.S. and Europe. Clearly, for things to be better, the U.S. consumer needs to join the party, as there’s a lot of direct and indirect demand from U.S. consumers of Chinese goods. ... I think that’s totally a function of employment.
I think Europe is potentially a bigger problem. It’s probably a slightly less important export market for them. But clearly the extent that Greece’s troubles spread to the other PIIGS [Portugal, Italy, Ireland, Greece, and Spain] and then theoretically to even the larger economies in the EU, it certainly would not be helpful for China.
Schonberger: There's talk of China allowing the Yuan to appreciate. What are the chances of that in your view?
Landesman: I think [the chances] are fairly substantial. I think the way they do that is they loosen the restrictions on the band versus the dollar that it can trade. I’ve personally always been skeptical that they’re going to free-float it -- I don’t think that happens. But the band will probably be widened ...
Schonberger: And what are the implications for China’s economy and the global economy if that happens?
Landesman: If their currency appreciates, it’s going to become more difficult for them to export. It will probably cause their companies and their government to focus more on domestic demand. We know China is seeing that in the midst of the greatest industrialization probably ever in the history of the world. So it’s not like there isn’t demand there.
It’s difficult being the people in charge of this balancing act in the Chinese economy, because on the one hand you need jobs to be created to continue the flow of people from the rural areas to the urban areas, which is happening whether you want it or not. That is partially driven by export demand, and lower currency helps that export demand. On the other hand, you have a much better chance of creating artificial bubbles by essentially jimmying with your currency, which is essentially what you do when you have an unrealistic band around it. So it’s clearly a slippery slope.
Schonberger: What are your expectations for China politically, and what does that mean for investing there?
Landesman: I don’t see any regime change in China any time soon ... I think it’s a great place to invest governmentally, ironically. It’s really the only functional communist government in the world. They’re very transparent, and when they want to do something, they can do it a lot quicker than democratic governments. They don’t need any bipartisan support over there.
Schonberger: What are the best trends investors can cash in on for the long term?
Landesman: I think the best companies in the region are going to be companies that play off of the industrialization and the emerging middle class. So infrastructure-related companies would probably be my favorite companies, [as well as] construction companies, capital goods companies, materials companies, transportation companies, [and] power generation companies.
There’s still a tremendous amount of infrastructure that needs to be built in China, and I think the government is going to stimulate that, because those industries also tend to be very employment-intensive. China fights unemployment harder than we do here, because at the end of the day the regime survives by keeping the people working and fed. So all of the trends point to there being a reasonably inelastic demand for infrastructure industries.
Schonberger: Where is China in the industrialization process? How many more years to go?
Landesman: A little less than two-thirds of the world’s population lives in urban areas. To give you an example, continental Europe is all above 90%. China is in the mid-40s now. So if you aver that they are eventually going to at least get to the world average, or to 60%, you’re still talking about 15% of the population. That’s 15% of 1.4 billion -- over [200 million] people relocating over some period of time. So my sense is that 20 [million] to 30 million people a year are going to be moving from the country to the cities probably for the next 15 years. That’s the enormity of it ... it’s massive and will require almost continuous infrastructure spending. Infrastructure in China is always going to be behind the population, not leading the population.
Schonberger: What are the biggest challenges China faces now?
Landesman: The biggest challenge is getting the various states to align. They tend to operate almost entirely independently. So, for instance, one province will ignore what the other is doing in terms of steel production.
Steering an economy that’s infinitely bigger than it was 10 years ago is [also] an enormous challenge.
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