Benson's Economic &
Market Trends
 Investing in China is Russian Roulette
Richard Benson
May 16, 2004
There is certainly too much
"rush- in."
Investors, blinded by their
own greed, are investing heavily in China because they believe
they will immediately make money when China's central bank revalues
their currency upward. There is no question that China is delighted
to take in all the Foreign Direct Investment ("FDI")
that comes their way! Indeed, China is encouraging greedy foreign
investment with the ultimate promise of revaluation. However,
foreign investors will soon discover this FDI is a gift, rather
than an investment!
The Chinese government has
been permitting their private sector (which, of course, is not
private at all) to spend like drunken sailors on all types of
fixed investment. Investment in China works this way: The citizens
save 40% of their income and give it to the banks, and then the
banks give the money to insiders who spend it on their "pet
investments." Surely, some investments will pay off and
somebody will make money. Believe me, without new plants and
equipment, China would not be filling the shelves of Wal-Mart
with cheap goods and continuing to empty the factories
of workers in America and Europe.
All investment ideas, including
the good, bad and ugly are getting financed in China and the
amount of capital that is wasted is far greater than the waste
from the telecom and dotcom crashes in the United States. A reasonable
estimate of the percentage of bad loans at Chinese banks is 50%.
This means that no sane investors would keep their money
in a Chinese bank. Cash under the mattress or in gold or silver
would be much safer. China is likely to be a classic emerging
market "Investment Roach Motel" where the money checks
in, but it doesn't check out.
Let's get back to the blind
foreign investors. They have forgotten that their money has been
spent on Chinese imports. China would much rather spend easy
FDI money - given to them as gifts by investors - than the hard-earned
dollars and other foreign exchange earnings they have earned
from selling goods to Wal-Mart. When the time comes for FDI investors
to get their money out, they will be no better off than the bank
shareholders whose portfolios consist of 50% in bad loans. They
will be left with bad debt, while China continues to import goods
and build new factories, roads and power plants. In reality,
the investment model is cheap foreign aid at the expense of foreign
investors.
China's growth is a major "world
event." There are certainly ways to make money off what
China does but blindly throwing money at the country is not one
of them. First, it pays to be a Wal-Mart, or U.S. producer, that
only wants to benefit from China's slave labor. As long as one
buys well-made goods cheap, who cares? Second, China has to buy
a lot of goods and raw materials from others; they need iron,
copper, lumber, oil and food to build their economy.
For foreign investors and speculators,
playing commodities and investing in the firms that benefit from
China makes sense. However, putting up the money and developing
the technology to build new factories there only makes sense
if the investors can be guaranteed access to cheap goods
(made with China's almost free slave labor) that can be sold
in their home country's market.
Third, watching what China
does is critical. For steel, copper and other key commodities,
China is, in a sense, "bidding against themselves"
while hedge fund speculators are getting a free ride. Now, as
China's leaders slow their economy, it is more likely than ever
that the over-heated Asian stock markets will suffer the most.
Commodity prices have come down as the hedge funds liquidated
their "reflation trade" in metals. However, it is likely
that there will be no more than a pause in a long bull market
in commodities. We have noticed that even with massive FDI and
a war chest of $400 billion in foreign exchange reserves, China
realizes that foreign exchange is a scarce resource and, so far
this year, they are running a trade deficit! Moreover, China
has 1.3 billion people to feed and their harvests are not going
as well as planned. They need to shift commodity buying more
towards soybeans and wheat, and away from copper and steel. China's
rate of increase in commodity purchases will slow and could resemble
the Chunnel investment fiasco. (The Chunnel has been great for
the people but the initial investors will never get a return
of their money).
Even if there is a financial
bust in China, we do expect to see their factories turning out
even more goods for export and rising consumption of imported
oil, food and metals. China has more people than jobs or capital
(there are over 100 million unemployed workers). If the country
doesn't grow, their political situation could become explosive.
Finally, there will be financial
shocks coming out of China very soon. Some form of stock market
correction, bank system restructuring, and a banking bad loan
failure is starting to occur. It's likely that China will also
revalue their currency. Because they have tied their currency
to the dollar and the dollar has recently risen, China is getting
the benefit of cheaper commodity prices. When the dollar starts
to fall later this year, that's when revaluation makes sense.
A stronger dollar will help China keep the commodity import process
down, and, like the oil producers, they will get more value for
their ultra-cheap exports.
Richard Benson
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold Inc
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