China won't save us – safeguard your wealth now
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Associate Editor
David Stevenson Nov 25, 2011
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Thank goodness for China.
The US is going nowhere. Europe's heading back into recession. But China should be able to keep global growth going.
And even if China suffers a few bumps along the road, it's the superpower of the future. So best invest in it now.
At least, that's the story the bulls are sticking to.
Sadly, it isn't likely to work out that way. With China now facing some huge problems, the country is a long way from being a 'safe haven' for investors.
Let me explain why – and then we'll take a look at where you should really be looking to invest your money in these uncertain times.
China's storming growth is stalling
China's economic growth has been nothing short of spectacular in the last 20 years or so. Since 1996, growth has averaged 9% a year. At its peak, just before the Great Recession of 2008/09, it hit 14% a year.
You can quibble about how accurate the Chinese figures are – that's a story for another day. But there's no doubt that China is now the second-biggest economy in the world after the US, and ahead of Japan.
Further, it has made so much money that it's been able to buy more than $1.1 trillion of US Treasury securities. That's almost 25% of the total outstanding. In other words, without China, the American government would have had to stop borrowing a long time ago.
What's more, there have been high hopes that China might also bail out some of the busted countries in the eurozone. But don't count on it.
In fact, don't expect China to provide much help to anywhere outside its own borders. It's facing more than enough problems of its own to worry about bailing out Europe, or anyone else.
For starters, that much-vaunted economic growth looks to be a thing of the past. PMI (purchasing managers' index) surveys show how many goods and services are being bought in by businesses. So they provide vital clues about how well those firms are getting on. A PMI number above 50 indicates expansion, below 50 means contraction.
The latest 'flash' (ie early), PMI indications suggest that activity in China's factory sector is shrinking at the fastest rate in nearly three years.
A Chinese 'pyramid of piffle'
The real worry is what's behind the slowdown. The bull's argument is that China will 'rebalance' away from its dependence on exports, and will rely more on its own consumers to drive its economy forward.
But the survey showed that the slump in manufacturing was primarily driven by a fall in domestic demand. Export orders continued to grow. But with much of the rest of the world struggling, that may not last.
It's little wonder that domestic demand is dropping. China's property bubble – inflated by state-promoted bank lending – is in the process of bursting. As everyone in the West knows to their cost, nothing puts a stop to consumer spending like a falling housing market.
The fallout for the economy from all this could get very nasty. And the Chinese authorities won't be able to stop the rot. "Investors in the West are relying on the bureaucrats who caused all this to fix the problems", says Greg Canavan for the Daily Reckoning Australia.
"They won't be able to. In the same way as the boom gets away from the authorities, so does the bust. If you think China's central planners can tweak levers in a control room to correct the situation, you're not really thinking.
"Chinese policymakers have about as much chance of halting the property and asset bust as the Fed had of stopping the subprime crisis."
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Albert Edwards at SocGen is even blunter. Expecting a "China soft landing" – a nice gentle economic slowdown – is "yet another 'pyramid of piffle'. Investors should prepare for both a hard landing and a currency devaluation" (more on that in a minute).
The fact is that investors have already suffered heavily. The Chinese stock market has been tricky for months. And Hong Kong shares – the easiest way in for UK investors – have dropped by 22% this year in sterling terms.
Even Britain's answer to Warren Buffett – Fidelity's poster boy Anthony Bolton – has been caught out, as our editor-in-chief Merryn Somerset Webb blogged last week: Why China's hard landing is closer than you think. The point is, with the possibility of a major slowdown looming, things could easily get worse from here.
China's currency is not a one-way bet
Then there's that exchange rate issue. Many people have been talking about the Chinese renmimbi – the country's currency – one day taking over from the US dollar as the global 'currency of choice'. That's left many investors with the impression that the 'redback' is a one-way bet.
"But this prediction might be premature", says Robert Cookson in the Financial Times. "In contrast to popular perception, evidence from China suggests the internationalisation of the renmimbi is stalling, and in many respects has barely got off the ground."
Cross-border trade settled in renmimbi in this year's third quarter fell for the first time since June 2009. That's because the buck is still seen as a sounder bet in periods of turmoil. Indeed, as Edwards notes, with the all-important manufacturing sector struggling, there's more chance of the renmimbi being devalued as the Chinese authorities try to make the country's exports cheaper.
All in all then, if you're looking for somewhere to shield your cash from the turmoil in the markets, China is not the place to go.
So where should you be looking instead?
We've been suggesting since July that the US dollar was set to pick up. The latest eurozone woes have really got it motoring as investors have hunted for some form of security. Just to be clear – the dollar is not attractive in its own right. The Fed would happily print it into oblivion if it felt the need. But where else are investors going to go?
The euro could splinter at any minute. The yen is already far too strong. And no other currency offers the sheer scale needed to accommodate 'safe haven' flows of any size. So for now, it's the dollar by default. You can keep track of how the dollar is doing against sterling here.
As for other, more obscure safe havens - in this week's issue of MoneyWeek magazine (out today), my colleagues Eoin Gleeson and Sean Keyes spotlight some more sanctuaries for your money. Subscribers can read the piece here: The search for safe havens for your money If you're not already a subscriber, get your first three copies free here.
• This article is taken from the free investment email Money Morning.
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