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Even before this crisis, Beijing knew that the economy's problems were on the consumer side. China's consumers make up just 40% of that country's economic activity; in the U.S., consumers constitute about 65% of the economy. The consumer sector contributed just 20% of China's growth in 2007 compared with a 35% contribution from exports. That imbalance has left China overly dependent on exports.
The slowdown in the economies of the country's biggest trading partners is projected to cut China's export growth to 10% in 2009 from 21% in 2008. That's frightening to the Beijing government because the global boom that just ended left many China industries with huge overcapacity. Many sectors face a massive shakeout of their most inefficient companies -- and a huge loss of jobs -- unless the Beijing government can find a way to increase demand.
Spreading the wealth
China has already taken one big step to increase consumer spending. On Oct. 19, the Central Committee of the Communist Party announced that while peasants would still not own their land -- the state owns it all in China -- they could now trade their right to farm their land. Essentially, the new rule makes it possible for farmers to sell the long-term leases on their land.What does this have to do with consumer spending? People are more willing to spend when they have an asset -- such as land, a house, a pension plan or an insurance policy -- that gives them long-term security. As part of its move to a more market-oriented economy over the past 30 years, China effectively dismantled its systems for providing education, health care, job security and retirement income to its citizens. All that became the responsibility of the individual, who also had to pay to send a child to school in many cases, to go to a doctor or a hospital and to save for retirement.
This was hard enough for the country's city dwellers, and it was almost impossible for the country's peasants. Their major source of income and of potential long-term wealth, the land they farmed, didn't even belong to them. They couldn't sell it to raise capital to start a business, invest in the stock market or move to the city. And they couldn't use it as a source of money when they got sick or old. Selling a lease isn't the same as owning and being able to sell the land itself, but it's a move in that direction.
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The Chinese government has other, similar moves that it could make to increase consumer spending. It could sink more money into the country's medical system, making better medical care more accessible and affordable. It could invest in schools and cut school fees for the hundreds of millions of Chinese workers who don't have legal status as residents in the cities where they live. It could increase investments in retirement plans so they paid something closer to a livable pension.
All this would increase the security of the average Chinese citizen. That would, in turn, free that citizen to become the consumer that the Chinese -- and global economy -- need in the long run.
I don't know if China will travel down this road or how far the Beijing leadership will go. We're talking about venturing into unknown territory, and no one knows exactly how these changes would play out.
Allowing peasants to lease their land could result in the creation of larger, more-efficient farms, but it could also set millions of peasants on the road to China's big cities. That's not exactly what a country wants as it struggles to provide jobs for all who need them. The current global economic crisis could serve as a trigger for changes that the country badly needs -- or as an excuse for doing nothing. I expect a huge internal and largely invisible battle among party leaders in Beijing over exactly how far to go in creating a consumer society in China, although I doubt that anyone will ever call it that.
We will still be able to track its progress. For example, if you see China buying up part of the huge surplus in aluminum produced by its domestic aluminum industry for a strategic reserve, you should score that one for those who favor the existing industrial-export economy. If you see a plan to invest in schools or clinics, score that point for the side that favors getting more economic growth from the consumer sector. If you see announcements of big government investments in solar power that will provide funding for the country's stated goal of moving away from oil and coal, score that a point for the industrial economy. If you see efforts to let more overseas companies sell life insurance in China, score that one for the consumer economy.
How does this play out for investors? If you're looking for a quick turnaround in the global commodity markets, then you want China to plunk down for a traditional infrastructure stimulus plan and lots of buying of commodities for strategic reserves. Right now, for example, fears are that iron ore prices will fall 10% to 20% in 2009 if the Chinese steel industry, now running at just 30% to 50% of capacity, sees exports stay at current depressed levels. I don't think this solution would work in the long run, but it would provide a short-term fix to some very depressed sectors of the global economy.
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Energy dominoes keep fallingEthanol maker VeraSun has filed for bankruptcy. Suncor has delayed oil sands expansion, and Petro-Canada is about to indefinitely postpone its operation. We're going to see similar situations where the cost of producing energy is too high, Jim Jubak says.
On the other hand, if you're looking for long-term stable growth in the global economy, but growth that might take longer to arrive, you'd like to bet on the consumer stimulus plan. A global economy where China consumed more and the Chinese economy depended less on exports would be a healthier economy in the long run.
I've got one stock for each of these two possibilities on the watch list that's at the end of this column. Suntech Power (STP, news, msgs) would be my choice for exposure to China's infrastructure stimulus solution. China Medical Technologies (CMED, news, msgs), a major producer of diagnostic tests and devices, would be my choice for exposure to China's consumer stimulus solution.
Or you can get some of both stimulus solutions with BYD (BYDDY, news, msgs), the world's third-largest maker of rechargeable batteries. At the end of September, Warren Buffett's MidAmerican Holdings, a part of Berkshire Hathaway (BRK.B, news, msgs), bought 10% of BYD for $230 million. The Hong Kong-listed stock trades as an American depositary receipt on the over-the-counter market. I'm adding it to my watch list with this column.
Continued: Updates to Jubak's Picks
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