Winston Churchill famously referred to the Berlin Wall as the “Iron Curtain” that separated the free from the oppressed.
In the investment world, there’s an “iron curtain,” too – namely, between retail investors and privileged, high-end investors, such as hedge funds, pension funds, and institutions.
In short, most individual investors unfortunately receive secondhand, conventional, run-of-the-mill advice.
But sophisticated investors like my former client, the Tiger Management hedge fund, value private, timely, on-the-ground intelligence. They expect a global perspective, coupled with local acumen.
I saw this firsthand on my recent investment tour across Southeast Asia, where I got the real lowdown on what’s happening in China…
Problems Mounting
While in Singapore, where wealth assets have surged by 1,120% since 2000, I had fascinating meetings with tycoons, bankers, and ambassadors about the state of both the global and local markets.
The topic of conversation obviously turned to China. Not just because of its recent stock market woes, but because for centuries, countries like Singapore have been China’s competitors, suppliers, investors, and borrowers all rolled into one.
So they have to know what’s happening behind the scenes in China because their very survival depends on it.
But right now, they’re worried…
For a start, the main concern is that China’s economy is slowing, as the two drivers of past growth – investment in manufacturing/industry and exports – pull back for different reasons.
In addition, China’s real estate bubble is unwinding, industrial manufacturing capacity is way beyond current needs, and the country’s once-powerful labor cost advantage has evaporated, as countries like Vietnam, Indonesia, Bangladesh, and even Mexico now have lower labor costs than China.
To put things in perspective, manufacturing wages in China have risen 10-fold over the last decade.
This decline in competitiveness has hit export growth hard, with an 8% year-over-year decline recorded last month.
Consumption is also spotty at best, with domestic auto sales actually declining for the first time last month.
Weaker exports and manufacturing has led to factory closures, bad loans, and unpaid wages piling up. In turn, this has sparked protests – more than 200 public demonstrations have occurred already this year, according to an independent watchdog group.
This sort of activity is watched closely by the Chinese government, which fears unrest above all else.
China’s Government: From Help to Hindrance
So you can’t blame politicians for trying anything and everything to stimulate growth.
They took measures to beef up the stock market early this year – a strategy that resulted in a 60% rise through June. But their clumsy and heavy-handed interference eventually backfired – turbulence and panic cut the year-to-date return down to 23% in less than a month.
You know the story from there, as the Chinese markets have continued to fall.
Next on the government’s menu is “adjusting” how the value of the yuan is determined.
By basically pegging the yuan to the US dollar since 2004, it’s made China somewhat uncompetitive as the Japanese yen, Australian dollar, Canadian dollar, euro, and regional currencies have significantly cheapened against the greenback.
This has put Chinese exporters at even more of a price disadvantage.
The official line is that China is moving to more flexible exchange rates that are driven more by the currency markets.
But keep in mind that a policy of weakening the yuan comes with significant risk.
- To many in China, a weaker currency is a loss of face and prestige.
- The perception of a weakening yuan will accelerate outflows of money from China. This is already a major problem as tycoons, entrepreneurs, and even middle-class Chinese are increasingly moving their wealth overseas to places like San Francisco, Vancouver, Singapore, London and Sydney.
- A weaker currency drives up the costs of all imports, including food.
- China’s 100 million tourists like a strong currency that makes overseas trips and shopping cheaper. Not to mention the 10 million Chinese students who study abroad each year. A weaker yuan drives up costs, especially for politically sensitive middle-class families.
As China struggles with all these issues, what does this mean for investors?
How to Catch Profits From China’s Meltdown
For a start, forget buy and hold. China is a pure trading market.
Follow China’s capital flight – it will point to great opportunities.
Look to China’s competitors, especially Asia’s other big dog, Japan, as it benefits when China falters.
As far as commodities are concerned, remember that just a few years ago, China bought over half of the global supply of many of these commodities. Be wary of trying to catch the bottom as they crash.
Stay tuned – more on all this in the coming weeks.