Five Viewpoints: Is China A Buy Right Now?

June 24, 2013

Paul Dietrich

Paul Dietrich
Fairfax Global Markets

Big Boom Coming; Commodities To Benefit

The Chinese stock market has recently sold off over fears that the Chinese economy will continue to slow down.Investors need to understand Chinese growth cycles. Just as politics and Federal Reserve policies affect U.S. economic growth, so do the official Chinese five and 10-year economic plans in this centrally planned economy.

Chinese officials take these five and 10-year plans very seriously, and government officials throughout the system are held accountable for the strict implementation for each part of the plan they are responsible for implementing.

Chinese leadership changes every 10 years and at the end of 2012, President Xi Jinping and the new group of politburo leaders have just come into power and are just starting to complete their new five and 10-year economic plans.

The central focus of the previous 10-year economic plan was on transforming cities in preparation for the 2008 Summer Olympics. Most of the plans were tied to that deadline and China was largely successful in completing most of these plans. This focused effort of massive spending tied to a specific event and specific dates explains the phenomenal Chinese GDP growth leading up to 2008.

Having met most of their long-term economic planning goals by 2008, the previous Chinese leadership has coasted for the past four years. They also understood that double-digit GDP growth was unsustainable, so they purposely announced they would slow future growth to somewhere between 6 and 7 percent. They have been successful in achieving that goal with what is described as a "soft landing."

China's New Five-Year Economic Plans

The new leadership has recently released its new five-year economic plan, and the sheer sweep of this ambitious plan is hard to conceive. This plan intends to completely restructure and diversify the entire Chinese economy from a largely export manufacturing economy to an integrated economy similar to that of the United States.

One of the most ambitions projects in the new plan will move 250 million people from rural areas to newly constructed cities over the next 12 years. That is like building new cities for almost the entire population of the United States over the next 12 years.

Think about the roads that will be built, the copper, steel and concrete that will be needed, the electrical and telephone grids and lines, and the new economic development that will come from this infrastructure investment.

Think about the cars and refrigerators and air conditioners and microwaves and computers and everything else that will be bought by these new 250 million relocated consumers.

Recently, we have seen "capitulation selling" in gold, copper and other industrial commodities. Usually when you see this kind of "blood in the streets," we've hit a bottom in the market.

China is the world's biggest driver of copper and industrial commodities.

When Will These Plans Start To Affect Commodities?

It's not a question of "if" this new Chinese five-year economic plan will be implemented, it's only a matter of "when" the effects of this new plan will start being felt in the commodity markets and other economic sectors.

The five-year plan has been announced, the engineering plans have already started—the big question now is, When will the purchasing begin?

Currently, commodity prices are at multiyear lows. This situation will not last long, as China embarks on its new five and 10-year infrastructure programs that will drive all industrial commodity prices much higher. Now could be the time to start investing in commodities and China again.


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