China’s Trade Surplus Goal Signals It’s Time To Dance With the Dragon (CAF, GM, YUM, MCD, HON, CAT)
Kerri Shannon: China’s economic model has long been dependent on exports. Over the past several decades, the country has been the world’s manufacturing floor, turning the “Made in China” stamp into a common fixture of goods sold in the United States and Europe.
But now China has made a new goal: It will double its imports by 2015, reducing the trade surplus to zero and releasing itself from an export-reliant economy. Beijing this year made this goal a key part of China’s 12th Five Year Plan.
This bold new target represents a major shift in the balance of global trade and a new paradigm for which the United States is not prepared, according to Money Morning Chief Investment Strategist Keith Fitz-Gerald.
“The West needs to realize that the United States is dangerously close to being completely irrelevant to the Chinese growth model,” Fitz-Gerald said in an interview. “China will not live and die by U.S. demand.”
rplus was $13.1 billion in December 2010, the smallest in nine months and a 42.8% drop from November’s $22.9 billion surplus. Exports rose 17.9% from a year earlier, while imports were up 25.6%.
Last year marked the second consecutive year that China’s trade surplus shrank, falling 6.4% from 2009 to $183.1 billion. Imports rose 38.7% from the year before while exports increased 31.3%.
Some economists attribute the climbing import value to higher prices for commodities and imported goods instead of increased domestic consumption, but Fitz-Gerald said these assumptions are misled.
“There is always going to be an imbalance between the value-added content of what they import and what they export,” said Fitz-Gerald. “China’s exports are becoming more and more upscale just as Japan’s did, which is probably the same pattern for all developing nations. Sort of like the great days of the British Empire – you sell us iron ore and we will sell you nails, hammers and shovels.”
Also, China’s trade surplus is shrinking as a percentage of gross domestic product (GDP), from almost 11% in 2007 to 3%-4% in 2010 – suggesting domestic consumption is becoming a bigger force in China’s economy.
“China’s foreign trade is, in general, heading toward a balanced structure,” China’s General Administration of Customs said in a statement on its Website.
Easing Away From Export-Dependence
China has made balancing its trade a key focus of its latest Five Year Plan, which went into effect this year.
“This proposal includes one very important sentence: Develop imports to achieve economic balance and structural adjustment, and promote fundamental balance in trade accounts,” Liu He, a vice minister at the central government’s Office of the Central Leading Group on Financial and Economic Affairs, told MarketWatch. “That’s a big change from the old pursuit of trade surplus and export as a means to accumulate foreign currency.”
China’s government has said it is acknowledging the changing macroeconomic environment and the country’s new role as the world’s second-largest economy.
“They believe now China’s economy has gotten to the point where it can handle this kind of transformation,” said Fitz-Gerald. “Many people continue to believe that China will live and die by its exports to the United States. Not so – exports account for only about 30% of its GDP and even less of its growth as that nation shifts to internal consumption.”
Chinese domestic consumption grew at an average rate of 15% between 2001 and 2010, positioning the country as the world’s second-largest importer in 2010, according to China Daily. Total import value has surpassed $1.4 trillion – 10% of the global import total.
China’s trade with the United States totals about $305 billion in exports, or about 20% of China’s export total. That’s about 5% of China’s GDP, which means a significant drop in U.S. imports would not be the crippling blow that many economists have suggested in the past.
The State Information Center forecast China’s imports to rise 20% in 2011 while exports increase by 16%. That would trim the trade surplus by 13.2%.
Li Jian, a researcher with the Chinese Academy of International Trade and Economic Cooperation, said in a statement on the Chinese Ministry of Commerce Website that China would reach its goal of boosting imports by cutting import duties, subsidizing interest payments on loans for imports of certain products, and generally facilitating import activity. Li estimated China’s imports would grow 10%-20% in 2011.
China has already started cutting import tariffs on some electronic items like laptops and digital cameras by 10%-20%.
The commerce ministry announced during the recent Commerce Work Conference that it would be developing guidelines to encourage imports of mechanical and electrical products this year. It will also focus on imports related to clean energy, aerospace, infrastructure materials, automotive and technology information.
And despite continuing claims from U.S. officials that China’s yuan is significantly undervalued, the currency strengthened 3% against the dollar last year and is on course to make further gains in 2011. Some economists expect the yuan to hit around 6.3 per dollar by yearend.
Time to Dance With the Dragon
China isn’t just focused on increasing imports from targeted sectors. It also seeks to increase foreign investment in these areas – and has eyes set on U.S. and Europe-based companies.
China’s Ministry of Commerce Chen Deming told the China Daily that the government would encourage foreign investment by Chinese companies this year. China’s overseas investment was up to $60 billion last year.
“In order to double imports and reduce the trade balance to zero by 2015, China’s going on a global buying spree that makes the Japanese buying binge of the late 1980s look like amateur hour,” said Fitz-Gerald. “It will be psychologically devastating to see once proud American and European companies gobbled up, but immensely profitable too for those with the understanding of what’s going on.”
In 1980, Japan had $8.7 billion invested in the United States. After years of strong economic growth and easy credit, Japan’s U.S. investment was up to $83.1 billion by 1990.
Now another Asian powerhouse is looking for deals from the West.
“China has a global shopping list and they are going buying,” said Fitz-Gerald. “They have $2.8 trillion in reserves to play with. They’ve got the gold, and guess who’s making the rules? China is increasingly calling its own shots.”
Nexteer Automotive, a Michigan-based car steering systems maker, is living the reality of China’s interest in U.S. industry. The company, known as Saginaw Steering Gear for most of its existence, had been a staple in the auto industry for a century until General Motors Co. (NYSE:GM) sold the unit to Chinese investors in November 2010 for $450 million in cash.
Nexteer’s 3,600 workers are more likely to keep their jobs than without the sale, and the company has more capital to grow as the U.S. economy continues its recovery.
Troy Newberry, the union leader at Nexteer, told the Los Angeles Times that he and fellow workers aren’t concerned about what country is signing their paychecks, so long as they’re being signed.
“There weren’t a whole lot of options,” Newberry told The Times. “The alternative was somebody breaking us up or moving it away.”
Now Nexteer’s new owner, Pacific Century Motors, has pledged to invest more than $100 million in the business’ operations and recently posted 100 job openings. Pacific Century Motors is backed by an investment group funded by Beijing’s municipal government.
Chinese firms provide jobs for about 10,000 Americans. Chinese investment has grown from less than $5 billion in 2008 to $12 billion now, according to consultancy Rhodium Group.
When Chinese President Hu Jintao visited the United States in January, he attended a Midwest business exhibition in Chicago to promote U.S.-Sino business relations and spur economic development. Most of the businesses in attendance were Chinese-funded.
The increasing Chinese business presence in the Midwest is sparking new Chinese-language programs in local elementary schools. Chicago Mayor Richard Daley has said he wants “to make Chicago the most China-friendly city in the U.S.”
There are already 10 times as many Confucius Institutes and Confucius Classrooms – non-profit groups promoting Chinese culture and language studies – in the United States now as there were in 2006, according to The Wall Street Journal.
This growing interest in preparing children for a China-integrated U.S. future is something Fitz-Gerald can attest to. His sons are already learning Mandarin.
How to Join China’s Shopping Spree
With China eyeing takeover opportunities in the United States, investors have the opportunity to profit. U.S. companies that can help China invest in technology, aerospace, energy and infrastructure are going to be incredibly enticing to the Red Dragon and its fat wallet.
U.S. firms also will benefit from increasing Chinese demand. China’s Ministry of Commerce Chen Deming said he has consulted with the United States about doubling U.S. exports to China to the tune of $200 billion by 2015.
Investors should start by looking at companies that are already in front of Chinese consumers.
McDonald’s Corp. (NYSE:MCD) and Yum! Brands Inc. (NYSE:YUM) are two food operators profiting from China’s growing consumerism.
Businesses involved in China’s targeted import sectors are also smart plays. Diversified tech and manufacturing company Honeywell International Inc. (NYSE:HON) has its hands in the automotive and aerospace industries, which are both growing on Chinese demand.
And companies like Caterpillar Inc. (NYSE:CAT) that have made investments in China’s growth are also putting themselves in profitable positions. CAT has plans to build a factory in China to easily supply the country for its increased machinery use.
Investors looking for a basket of Chinese stocks can check out the Morgan Stanley China A Shares Fund (NYSE:CAF).
“I particularly like CAF because small business ventures in China have the most to gain and most of those companies are traded only in China A shares,” said Fitz-Gerald. “And CAF is the only fund that gives U.S. investors ‘direct access’ to the A-shares.“
CAF is one of the best ways to profit from China’s shifting growth model. A recent portfolio allocation of the fund showed 28% of its holdings were in consumer goods and services, 26% were in financials and 18% were in basic materials.
CAF also holds shares in companies that make auto components and beverages, among other products, and has numerous stocks in the metals and mining sectors.
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