I'm in Shanghai, and the "China Miracle" is in full bloom. Few variables are more important in the world of metals investment than the strength and sustainability of the extraordinary bull run the Chinese economy has enjoyed for years. So many pundits, critics, and cheerleaders keep pouring out opinions on this question that they saturate the news - but leaves no one the wiser.
I'm sorry to say that, as arrogant as I am, I do not have quite the hubris to tell you that I have figured China out and know what is and will be.
But I can tell you that I've traversed China from south to north, from east to west. I've spent days driving through the countryside, passed through China's largest cities and smallest villages. I have seen a China that is visibly, radically different than the China I saw for the first time a mere six years ago. Ten percent growth compounded over six years is a 177%
difference - and the reality behind such numbers is unmistakable. Yes, there is still great poverty here and a lot of people living on a subsistence basis, but this is not a poor country. The fraction that has been lifted to middle class and above is enormous, and the country's GDP is now the second largest in the world.
Shanghai itself may not be the financial capital of China any more, as in a politically dominated economy like this, all the big decisions get made in the political capital of Beijing, but the wealth here is tremendous. The proliferation of high-Âtech buildings, modern houses, shopping malls, expensive cars, and more defies belief.
But the real shocker is the modernization of small towns and villages. Oxen have been replaced with tractors, rags replaced with bright new clothes, mud brick and thatch replaced with real brick and glass and electricity and satellite TV. The material improvement in the lives of hundreds of millions of people is spectacular.
To me, the most important economic consideration is that whatever the degree of misallocation of capital may be here, the allocation of most capital is to infrastructure, factories, power generation, mine development, agriculture, housing, and generally to durable and productive assets. China is gearing up to flood the world with products on a scale that could be an order of magnitude greater than what we've seen so far.
What if the EU disintegrates and the US sinks back into recession? What will China do with all its productive capacity then? Some would be wasted - factories and luxury cars can both rust for lack of capital to maintain them - but the productive capacity would still exist. With the investment already made, my guess is that the cost of goods manufactured in China would plummet. Particularly with so many stateÂ-owned enterprises - for which jobs and production may become more important than profit - selling at no profit would be better than shutting down. The central committee may even see flooding the world with inexpensive products as a way to help China's trading partners while helping themselves.
Is China in a bubble? Could the China Miracle turn into a China Nightmare?
I suppose it could; some massive misallocations of capital will certainly have to be liquidated. But a system that was already misallocating capital to an extreme degree can see major improvement simply by misallocating capital to a lesser degree.
Remember that unlike the US, the Chinese government is not borrowing money to build a network of highÂ-speed trains across the country; it's paying for it out of excess savings. On the household level, people who save 40% of their income every year could lose half their savings and still have a lot more net worth than the average, highly indebted American. And they'll still want new cars, or electric bikes, or even airplanes (I'm told that civil aviation has been legalized in China).
By the way, those high-Âspeed trains are linking more and more cities and are seeing heavy usage. You don't have to drive out of the cities to an airport; you don't have to be there an hour before departure time; you don't need to spend hours making connections; and there are many other advantages. Most critical is that the population density, I'm told, is sufficient to make the thing turn a profit. Plus, where there's high-speed rail, the regular lines are freed up for cargo only - and those trains now carry cargo up to 200kph!
My point is that if China is in a bubble, and if it does pop, this system will still be here, as will all the new highways, houses, factories, etc. This is not a deeply indebted nation of lawyers and hairdressers, but a cash-Ârich nation building up its productive capacity. If growth here were cut in half, it would still be substantially greater than in the US or EU.
What about social unrest? Well, that's one reason for China to keep manufacturing, even if profit drops off; but my sense is that, a few idealists aside, there is very little real pressure or even desire for major reform. People can see that things are improving, and they just want to better themselves.
What about China's military buildup and saber-Ârattling regarding those islands it and Japan both claim? Well, I was having dinner recently in a very large Chinese restaurant, where a large group of people were making round after round of toasts. The strength of the antiÂ-Japanese sentiment that the alcohol loosened was astounding. Many Chinese - even though few are left alive who witnessed it - deeply, deeply resent Japan's invasion during WWII. But I haven't met anyone here who wants war - they'd much rather just become richer than Japan and show the world who is smarter and better.
Similarly, I'd have to say that there is some sense of people here wanting to take over the world, but they don't want to conquer it; they want to buy it. China wants to be an economic superpower and seems prepared to remove any obstacles to that goal - including outdated Marxist ideas.
Whether that's good or bad is an important discussion, but it's not what we're here for today. The point for now is that all of this is bullish for China's continued demand for raw materials, including metals.
One more factor I'd like to touch on is the question of "internal demand" - are there enough people in China with the money and the desire to buy the output of China's factories and keep the economy here growing? I don't think so... not all of the output of all of the factories. But reduced demand from the rest of the world does not mean no demand, and China's internal
demand is certainly growing.
An anecdote: I happened to be near the famous Kumbum Monastery near Xining, Qinghai, in western China, so I stopped in for a look. The ancient Tibetan architecture and relics were fascinating, but I noticed that the biggest gold-Âplated temple of them all was not ancient, but built five years ago. The monks are repaving the streets with heavy blocks of tightfitting
granite. I saw - literally - piles of cash at the Buddha's feet and elsewhere, as the throngs left their offerings. But I saw only one other Westerner the whole day I was there. The renewal of this monastery is a testament to China's capacity to spend internally.
(Click to enlarge)
What I am trying to say is that China's economy may slow, but I don't think it will dry up and blow away. There may be a lot more correction in metals in the near term, driven by lower demand from China, as the growth rate moderates. But mid-Â to longÂ-term, major demand is baked in the cake. There will be money to be made in metals and mining for decades to come - and should we be so lucky as to get a meltdown before the metals peak, what a fantastic buying opportunity that would be.
We'll be watching to see how that unfolds and will let you know when we see major turning points and buying opportunities.