Why China will recover first

By Bill Fleckenstein

Recently I traveled to China to deliver a series of speeches. During visits to Beijing, Shanghai and Hangzhou, I was fortunate enough to meet with some people who know a lot about how the country functions. In this week's column, let me share the highlights of what I learned.

I think the most important thing for folks to understand is that China has not suffered the epic credit binge that much of the rest of the world has. China's savings rate is high. Mortgages require sensible down payments. Credit is something that hasn't quite come to China yet (although I understand that credit cards have recently become more available, especially in the big cities).

People pay cash for most things, though they do use debit cards. From a credit standpoint, it seems similar to how life in America was back when "Leave It to Beaver" ruled the airwaves. Meanwhile, the people I met were very industrious and their enthusiasm seemed quite high. (As a traveler, I was happy to discover that the airports were new and the bags arrived quickly.)

The biggest problem China faces is its dependence on exports. A large part of the export issue is the fact that China has roughly 150 million itinerant/migrant workers -- yes, you read that number right -- in the south who've moved there from the west. (Away from the big cities, life is difficult and people are poor.)

But China understands this problem. (I have left out many others and don't mean to gloss over them.) They are working overtime to stimulate the domestic economy, and there's a lot they can do. More importantly, as a country that has accumulated a couple trillion U.S. dollars, China has the reserves with which to do so. Relative to the problems faced by most countries, China's seem at least manageable and do not stem from having borrowed and spent like mad.

Opportunity in its infancy

The other thing to note is that the "capitalistic" progress they've made is really only 15 to 20 years old. China's cities are modern, and their infrastructure is very new. But from a socioeconomic standpoint, much of what I saw leads me to conclude that China is more like America was in the '50s and '60s. It is very early in the "China miracle," if you will. But I have reached the completely obvious conclusion, as have so many folks, which is that China is the wave of the future.

For anyone who'd like to learn more, I recommend a book titled "Mr. China: A Memoir" by Tim Clissold. (After being introduced by a friend, I was lucky enough to spend a couple of hours talking with Clissold during my visit.)

The investing challenge

The book will give folks an understanding of how difficult it has been in the past to do business in China. There is a serious old-boy network, related to China's bureaucratic communist party structure -- though it seems to me that they are communist in name only, and capitalist at heart.

I intend to do plenty of research in the coming months, because there's an awful lot to learn if one wants to be an investor there, not least of which is deciding what exchange (and shares) to use: Singapore, Hong Kong, Shanghai and/or Shenzen.

Given the recent decline in stock prices, the indices are not all that far from where they were in the mid- to late '90s, when everyone thought that China had so much promise -- before so many got burned.

However, I think a lot of those problems have been dealt with, especially the failed joint ventures and the related bad assets in the banking system. In sum, I believe that China will probably be the first country to recover from the worldwide recession.

Speaking of which, I did find it interesting that the National Bureau of Economic Research confirmed last week what I have believed for some time: The U.S. is in a recession (the onset of which the bureau dates to December 2007).

The next thing we should expect to see is folks looking for an end to the recession on a regular basis -- simply because we are now officially in one. That prognostication will likely originate from the same people who called a bottom nearly every day in housing stocks, then the housing market and then the stock market.

A postulate come to pass

But rather than some garden-variety recession, this is going to be the worst one in 50 years, and in fact is the "next time down" scenario I described in June of 2004 -- with the economy, stocks and real estate all declining.

Notwithstanding the massive monetary/fiscal stimulus that the government will be throwing at the problem, 2009 is going to be very ugly. Having said all that, I find it too dangerous to be short stocks, and far too early in the downturn to be long them.