Posts Tagged ‘china’
The Agricultural Stock Set to Feed China’s Demands
By Jeff D. Opdyke, Editor, The Sovereign Individual
Dear Sovereign Investor,
I stood recently on the shores of the massive Rio de la Plata that flows past Montevideo, and watched the cargo ships ply their way to soy-handling ports upriver in Uruguay and Argentina and out to sea for the long voyage to China.
In either direction, these voyages are largely about one thing … pigs.
It’s well-known that China is a pork-lover’s paradise – but that is an understatement of enormous proportions.
Just as the U.S. has its Strategic Petroleum Reserve, China has a state-mandated strategic pork reserve, because the meat source is so crucial to the Chinese diet and has proven so susceptible to big price swings.
In fact, China’s roughly 446 million pigs is a population larger than the next 43 pork-producing countries combined. The chart below will give you an idea of just how massive China’s pig populace really is…
Please click here to view larger image
My point here is this: pigs have to eat.
And China’s pigs eat roughly six billion bushels of feed a year, largely soy. That’s 70% more soy than the U.S. produces annually – and the U.S. is the world’s leading soy producer.
China must import a lot of its soy to meet demand. Much of it comes from South America – particularly Argentina, Brazil, Paraguay and Uruguay.
An Opportunity to Profit
And that’s precisely what I was watching on the shores of the Rio de la Plata. Many of those cargo vessels plying their routes up and down the river were linking the soy farmers of South America to all those pigs in China … not to mention the mass of Chinese consumers who use protein-rich soy oil for their daily cooking needs.
As economic growth in China and other emerging Asian economies fuels dietary change and protein demand, that spells opportunity to profit for the savvy sovereign investor.
In my years as a financial writer, I’ve learned that great investment opportunities never crop up by accident. Instead, they are typically a response to some economic sea-change.
The problem is that investors never see a global phenomenon until it’s already upon them – and by then they’ve missed the easy money. Part of that blame falls on Wall Street, where brokers rarely look past America…
To profit from the rise of the emerging-market middle-class requires that you rethink what Wall Street has told you for decades. Because, the richest veins on the planet today run through places like Jakarta, Hanoi, Accra, Dubai, Shanghai and Mumbai – the areas where literally hundreds of millions of new consumers are taking root.
One response to this economic sea-change is the giant wave of consolidation now taking place in the global agricultural market.
Swiss-headquartered commodity-trading giant Glencore International (London: GLEN) last month swooped on Viterra, Canada’s largest grain handler, in a $6.1 billion acquisition that will shake up the established hierarchy of the global grain market.
Access to Growing Demand in China
This multibillion-dollar deal not only gives Glencore a foothold in the crucial North American grain market, it gives the company direct access to the growing demand across Asia, particularly in China, where Viterra already operates grain-marketing and distribution businesses.
Viterra is also a major producer of animal feed for pigs and chickens.
Glencore, which in 2011 turned over $186 billion, has built a world-class reputation as a group of smart, influential and wealthy traders. Ivan Glasenberg, the company’s chief executive, has made no secret of the fact that he aims to make Glencore a bigger player in the North American grain industry and in emerging Asian markets.
Meanwhile, a legislative change in Canada that will take place later this year means Viterra will be able to buy more grain directly from farmers, thus potentially increasing Glencore’s profits.
Glencore is also in the process of merging with mining giant Xstrata, a major player in the global copper market and, in turn, China’s breath-taking growth. No doubt that pursuing two takeovers at the same time is aggressive, but Glencore has proven adept at creating shareholder value over time.
The new Glencore should be a core holding for any investor who can see the obvious reality – that the emerging middle class is placing ever-greater demands on the commodity world. Glencore is key player in sating those demands.
Until next time, stay Sovereign…
Jeff Opdyke
China Is Gold’s Future
By Frank Holmes
U.S. Global Investors
CEO and chief investment officer
The new report “Gold in the Year of the Tiger” from the World Gold Council (WGC) predicts that gold consumption in China could double in the coming decade as a result of rising demand for jewelry, hard-asset investments and industrial uses.
This forecast seems reasonable, and it lines up with what I’ve long been saying about the profound evolution in China’s economy – domestic consumption is replacing exports as the growth engine as more poor Chinese move up into the middle class and from there into the ranks of the wealthy.
Tens of millions of people in China are joining the middle class every year – by some estimates, they already number more than the entire U.S. population and could double in the next decade.
They are buying more spacious and better-outfitted homes. They have made China the world’s largest automobile market, and a wide range of brand-name Western luxury items are available even in provincial cities.
China has a centuries-long cultural affinity for gold, so it makes sense that more middle class and wealthy would mean more gold sales.
The line on the WGC chart above shows how investment demand for gold has rocketed up from next to nothing in 2001 to 80 tonnes (2.6 million troy ounces) last year, with the sharpest upswing coming after trading rules were liberalized in mid-2007. Over the same period, China’s GDP roughly tripled. The Chinese are famous for their high savings rate, and the chart shows how important gold has become as a store of their growing wealth.
The next chart compares China’s annual gold jewelry consumption to more than a dozen other countries. Last year, China consumed 347 tonnes in jewelry, which was about 30 tonnes more than the country’s total gold production (tops in the world). But on a per-capita basis, China is near the bottom of this list.
The World Gold Council points out that, if China matched Saudi Arabia on a per-capita basis, it would consume an additional 4,000 tonnes of gold jewelry each year. That’s more than last year’s demand for the entire world (3,386 tonnes), so even the most enthusiastic gold devotees would probably agree that it’s not a realistic number.
But given projections that the Chinese middle class will double in the next decade as China’s economic growth generates a wider distribution of wealth, it’s not farfetched to think that its gold consumption could also double.
It is farfetched, however, to think that China’s domestic gold output could keep pace with demand growth – more and more of the world’s gold production (on a declining trend for years) would have to be diverted to the Chinese market, and the result could be a significant impact on gold prices in the years to come.
Weekly Fundamental Outlook for Energies and Metals – US/China Policy Uncertainty Weighed on Commodities
The commodity sector got hammered last week as investors worried that overheating in China and US’ bank proposal to curb risk-taking would reduce demand for higher-yield assets. The Reuters/Jefferies CRB Index dropped -2.1% to 275.56, the lowest level since December 22.
Crude Oil
WTI crude oil slid -2% to close at 74.54 Friday in reaction to US’ plan to limit trading banks. Energy demand in the US and China is also at risk of slowing down. The front-month contract plunged for more than -10% over the past 2 weeks.
The US President Barack Obama proposed restrictions on risk-taking at financial institutions. The plan includes limiting the size of financial institutions and to ban some ‘risky’ activities including proprietary trading and internal hedge funds. The news damped investments for risky assets such as commodities and equities.
Having waited for 5 months, investors received the CFTC’s proposal on positions limits on energy contracts (physically settled and cash-settled futures in light, sweet crude oil, Henry Hub natural gas, and New York Harbor gasoline and No. 2 heating oil) on January 14. The purpose of limiting positions is to curb speculations of large banks and swaps dealers in oil, natural gas, heating oil and gasoline markets.
According to the Commission, the aggregate limits are set by formula based on open interest. The AMC speculative position limit would be 10% of the first 25,000 contracts of open interest and 2.5% of open interest beyond 25,000 contracts. The single-month position limit, in turn, is set at 2/3 of the AMC position limit. The position limits would be calculated off of the prior year’s month-end open interest.
Only very bigger positions holders will be affected by the limits and the CFTC showed that 3 unique owners in crude oil market and 1 in the natural gas market were affected during the period from January 1, 2008 to December 31, 2009. However, more traders in heating oil and gasoline markets were restricted.
Apart from the policy side, fundamentals suggested crude oil price should remain within a range of 70-80 in the near-term. Released Thursday, the US Energy Department reported crude oil inventory drew -0.47 mmb to 330.6 mmb in the week ended January 21. Utilization fell to 78.4% for 81.3% but decline in demand was offset by higher reduction (-4%) in imports. Draw in distillate stockpile more than doubled consensus forecasts as extremely cold weather last week raised heating oil consumption. Demand rose +5.8% to 3.823M bpd while production plummeted -10%. Despite the draw, distillate inventory remained +17% above normal. However, gasoline stockpile rose +3.95 mmb to 227.4 mmb as driven by -1.5% drop in demand to 8.602M bpd.
Last year, rally in crude oil price hinged on robust demand growth in China. Indeed, demand in the country was strong as indicated by oil imports which gorse +1.6M bpd yoy in December. The Chinese government reported economy grew +10.7% yoy in 4Q09, the fastest pace since 2007 in 4Q09. For all of the year, the economy grew +8.7%, exceeding the official target of +8%.
However, the data did not send energy prices higher. Instead, the expansion raised worries about further tightening in the world’s third largest economy. We believe Chinese demand in the near-term may slowdown due to policy tightening. However, in the longer-term, imports will pick up again as underlying fundamentals in Chinese economy stays strong.
Natural Gas
After rising on Thursday and Friday, gas price added +2.2% last week. According to the US Energy Department, inventory drew -245 bcf to 2607 bcf in the week ended January 22, sending total gas storage -0.2% below 5-year average. Colder-than-expected weather in the US increased gas consumption. As weather returns to normal in coming weeks, we believe demand will reduce and so will supply. For most of the time In 2010, imports from Canada will weaken while production will be lower than last year as the impact of -60% decline (from peak to trough through September 2008 to July 2009) in rig counts feeds in. However, LNG imports will ramp up rapidly. Over the period of 2010 and 2011, LNG investments such as Yemen, Tangguh and Sakhalin projects will raise total capacity significantly.
Precious Metals
Gold price tumbled amid profit-taking and broad-based decline in commodities. The benchmark contract for gold plummeted -3.5% to close at 1090.8 last week. Although the yellow metal has fell -6.2% from recent high at 1163, we still see further downside risk, particularly as February and March are weak months seasonally.
PGMs slumped Friday. Platinum dived to 1521.1, the lowest level in more than 2 weeks, before recovery. The metal lost -3.2% over the week. Palladium ended the week with -1.7% decline. Price slipped to a 1-week low of 425 Friday before buying interest emerged. However, rebounds after the sharp fall indicates underlying demand for PGMS remain strong.
In China, imports for platinum and palladium grew +115.7% yoy and +215% yoy, respectively, in December. China overtook the US as the bigger auto market by sales in 2009. At the same time, it also surpassed Germany as the largest car exporter last year. With global auto market anticipated to recovery rapidly in 2010. We believe import s of PGMs for auto-catalysts will rise further.
ETF investments in PGMs remained firm last week. According to ETF Securities, platinum holdings in European and Australian Trusts pulled back to 433.2K oz (-17%) in the week ended January 2010. Holdings in the new US ETF surged to 149.9K oz during the period, from less than 10K oz in the first trading week. For palladium, holdings in European and Australian Trusts declined -4.7% to 648.2K oz while that in the new US ETF rallied to 209.9K oz. Holdings in the first trading week was also less than 10K oz. We improved fundamental outlook and strong ETF investment should boost PGMs prices this years.
The CFTC will hold further hearings in March to discuss about position limits on metal markets. We do not think this would dampen metal demands. As metals are non-perishable and easier to store, restrictions on financial markets will direct investors to physical market investment.
Base Metals
Speculations on further monetary policy tightening in China weighed on base metals and the complex recorded broad-based decline last week. Copper proved to be the most resilient metal in the complex with only modest drop of -0.5%. China trade data showed that net refined copper import rose +26% mom in December. At the same time, the country’s inventory slid -3.3% to 97308 metric tons from the previous week. These evidenced China’s demand for the metal stays strong.
LME contract (3-month delivery) for lead plunged -8% to close at 2237. Last, we saw rapid rise in lead production in China. Producers stockpiled plenty of lead scrap in 2008 amid weak price and they released the scrap to the market in 2009 as price recovered markedly. This had led to significantly increase in secondary production of lead. We believe the phenomenon will continue in the first half of 2010 but should turn better in the second half. Therefore, we should be prepared for further weakness in lead prices in near- to medium-term.
Source: Oil n Gold
China Guided Yields Higher Again, Commodities Did Not React
Crude oil trades within a narrow range of 78 and 78.7 in Asian session. Sideways trading is expected to continue until European or even NY sessions when more economic data will be released. The People’s Bank of China guided its benchmark 1-year bill yield higher for the second time this month to cool down growth in loans. However, the market did not react much on it.
China’s central bank sold one- year bills at a yield of 1.9264%, up +0.08% from last week. This is the second time in a month the PBC guided the 1-year bill yield higher. Reports showed that property sales in China surged +75.5% yoy to RMB 4.4 trillion in 2009 while property price rose +7.8% yoy, the fastest in 18 months, in December. The Chinese government has been worrying about asset bubbles and began tightening last week by raising open-market yields and raising required reserve ratio for bank deposits.
On the macro side, BOC rate decision is the focus of the day. However, we do not expect any change in the central bank’s monetary stance. The BOC will likely decide to keep the overnight rate unchanged at 0.25% and reiterate ‘conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target’.
Industry-specific data will be API’s inventory which will be released after market close. Another week of huge stock-builds should resume recent correction in energy prices.
PGMs have clearly taken over gold and silver as the darlings of precious metal buyers. While platinum contract rallies to 1637, up +2.6% from Friday’s close, palladium contract jumped +3% to 461. Both contracts reach highest levels in one and a half year.
According to ETF Securities, holdings of platinum and palladium rose +0.15% and +2.81%, respectively, on January 18 from January 8.The newly launched US ETFs boosted investment demands.
Strong China Commodity Demand Can Boost Gold Price as It Increases Inflation Pressure
Gold price stays firm in European morning as the dollar continues to weaken against major currencies. We receive strong trade data from China yesterday but most investors only related strong imports to crude oil and base metals. This is understandable as China has become the world’s largest gold producer.
However, strong imports can still help boost gold price, in an indirect way. Robust demand from China tightens physical markets and increases inflationary pressure. This will force the Chinese government to appreciate RMB, despite in a small magnitude. Appreciation in RMB is positive for commodity in general. At the same time, the disappointing US employment data in December may help reinforce the Fed’s stance to keep its policy rate low for an extended period. An environment of low interest rate together with rising inflationary pressure is supportive for gold.
The strong momentum in Chinese commodity demand in 2009 should carry forward to 2010 although the pace may moderate due to unwinding of stimulus measures. Copper imports rebounded sharply to 369.4K metric tons in December (+29% yoy) after plunging to 263.1K metric tons in October. Imports reached a record high of 477.K metric tons in June. Iron ore and concentrate also recorded a prominent +80% yoy increase to 62.16M metric tons during the month. However, not all base metals received strong demand. Take a look at aluminum. Despite strong annual increase, the amount imported in December stayed at depressed level (-73% from record high made in April 2009). The reason is that Chinese production of aluminum rose in recent months and it’s expected China will become a net exporter of aluminum in 2010.
Surge in demand for iron ore and concentrate has been driven by strong auto sales which drove demand for steel higher. According to the China Association of Automobile Manufacturers, China’s sales of passenger cars, buses and trucks rose +46% to 13.6M units, the fastest pace in 10 years. This also suggested that China has taken over the US’s throne as the world’s largest auto market.
Crude oil price falls for a second day in European session. Currently trading at 81.75, the February contract has plummeted -2.6% from a 15-month high at 83.95 made yesterday. Apart from crude oil, others in the energy complex also gets hammered as weather in the Northern hemisphere is expected to get warmer later this week. Heating oil drops to 2.16 while gasoline falls to 2.135. Both commodities reached 15-months Monday.
Source: Oil n Gold
Crude Reverses Gains as China Raises Yield and Weather May Get Warmer
Crude oil reversed gains after failing to test 84 in NY session Monday. The February contract ended the day at 82.52, down -0.3%. Currently trading at 81.9, the decline accelerates as the central bank of China rolled out more tightening and weather forecasts suggested temperature will turn warmer later this week.
The People’s Bank of China (PBOC) sold 1-year bills at a yield of 1.8434% in open market operations. The yield has been staying at 1.7605% since August 2009. This may be a sign that China is trying to tighten the market more aggressively than expected. Last Thursday, PBOC offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation, +4 bps higher than the rate kept since August. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes.
Weather forecasts said that temperature will return to normal in eastern cities such as New York and Boston later this week. This news dampened bullishness as recent rally in energy price was driven by extremely cold weather in the Northern hemisphere. Traders believed the adverse weather condition should boost demand for energy.
Gold price settled at 1151.4, up +1%, after surging to as high as 1163 yesterday. A weak dollar may help push the yellow metal higher this week. Platinum extends its rally to 1602.5 in Asian session today. The benchmark outperformed others as the launch of the first US ETF spurred investment demand.
Last Friday, ETF Securities’ first US platinum and palladium ETFs started trading with strong volume. Initial allocation of the platinum and palladium ETFs were 9,969 oz and 9,996 oz, respectively, volume traded on the first day (reflecting both primary and secondary trade) reached 414,742 shares for platinum and 294,943 shares for palladium. Platinum holdings in the non-US ETFs also rose modestly by +158 oz to hit a fresh high, while palladium holdings fell by -5.5k oz to 1.155M oz.
Source: Oil N Gold
Strong China Imports Pushed Crude Price Higher
Crude oil price rose to as high as 83.67 after China reported strong imports in December. In 2009, robust demand in emerging countries, especially China, was the major driver for energy prices. We expect the strength to continue this year although withdrawal of stimulus measures may slow the pace modestly.
According to the Chinese Customs, crude oil imports surged +24% to 21.26M metric tons in December. On annual basis, the nation imported 203.8M tons in 2009, compared with 178.9M metric tons in the previous year.
Industrial activities in Asia has been picking up rapidly after slumping to very low levels in early 2009 as driven massive government stimulus plans. In China , the government implemented a plan worth $506B to stimulate growth, particularly in infrastructure and construction sectors. As a whole, the nation’s GDP is expected to grow by more than +8%.
The market’s focus is not policy tightening this year. Demand outlook for commodities will be affected if China starts tightening. However, we believe the government will only exit from the stimulus plans after a self-sustainable growth is seen in the economy. Therefore, the negative impact on commodity prices should not be too much.
Gold price rallied for the second consecutive day amid USD’s correction. The February contract for the yellow metal surged to a 1-month high of 1163 as the dollar’s decline for 3-low against the euro spurred gold buying. Disappointment in December employment report lowered expectations for a Fed rate hike as early as in June. Traders liquidated their long positions in USD and turned short.
Commitments of Traders:
Crude Oil: Net speculative long positions rose to 108.8Kcontracts, the highest 10 weeks, as price surged amid strong economic data and extremely cold weather. Although elevated inventory levels suggested energy fundamentals remained dismal, correction in USD indicated crude investment might still be robust in coming weeks
Natural Gas: Net speculative short positions surged to 156.6K contracts. Despite decline in gas inventory, the ample supply continued to depress price
Gold: Net speculative long positions declined 227.8K contract despite rally in price. Although net longs in gold have plummeted more than -10% from the peak in November, they remained at high levels
Silver: Net speculative long positions in silver rebounded to 395K last week. Silver price rose to a 1-month high as signs of global economic recovery spurred speculations that demand for silver in industrial activities should rise
Platinum: Net longs soared to 20.4K contracts, the highest level in 4 weeks. While strong auto data in China and OECD economies were supportive to price, launch of the first-ever platinum ETF in the US triggered investment demand
Energies Extend Gains as Strong China Trade Drives Sentiment
Crude oil extends rally to 83.95 in European session. Weakness in USD, abnormally cold weather in the Northern hemisphere and strong demand from China are pushing energy prices higher. Oil products also advance. Heating oil surges to 2.224. The benchmark contract has rallied in the past 4 weeks as government reports showed declines in distillate inventory. Gasoline price also rises to 2.185 as the rally accelerated after an upside break of 2.11 on January 4.
Attacks in Nigeria once again spurred worries about production disruption. Chevron reported that its Makaraba-Uyonana pipe was breached on January 8. This forced the company to shut down 20B bpd of crude oil production.
Rebel groups who want a share of oil revenues have been a threat to Nigeria’s oil production. Among them, the Movement for the Emancipation of the Niger Delta (MEND) is the largest group. The
MEND signed an indefinite ceasefire on October 25, 2009 and agreed to have peaceful talk with the government. However, it resumed attack in mid-December as member was dissatisfied with the progress of the negotiations.
Gold stays strong with other commodities as USD weakens. The February contract rose to as high as 1163 before pulling back to 1157.
USD’s rally against the euro accelerated after breaching the cluster of 1.4218-1.448. Currently trading at 1.453, the greenback has plummeted to a 3-week low against the euro as unexpected decline in payrolls evaporated traders’ hope for Fed’s tightening in 1H10.
Stock markets in both Asia and Europe advance as driven by robust trade data in China. Apart from strong commodity imports, export growth from China, up +17.7%, indicated global economic recovery is taking place in a fast pace.
In Asia, the MSCI Asia Pacific Index ex Japan rose +1.2%. Benchmark indices in Australia rose +0.8% while indices for both China and Hong Kong rose +0.5%. In European morning, UK’s FTSE 100 Index rises +0.6% to 5565.2, Germany’s DAX adds +0.4% to 6065 while France’ CAC 40 gains +0.7% to 4074.
Seven Reasons China Will Lead the Global Economic Recovery
The recent -21% tumble in the Chinese markets had investors around the world bailing out of China as fast as they could. But, this sell-off actually created one of the biggest buying opportunities of a lifetime. Here’s why China is poised to take off — and how to cash in as China leads the global economic recovery.
August 2009 was one of the worst months ever for the Chinese stock market, with stocks dipping -21%. But the major sell-off wasn’t based on any fundamental news — it was a case of frightened investors worried that China is the next bubble.
The truth is, China’s fundamentals are sound. Chinese consumers are accelerating their purchases, exports are growing and Chinese GDP is on track to grow +7.9% by year-end. This is no bubble — Chinese stocks don’t have anywhere to go but up.
Don’t let western bias fool you. It is not the U.S. that will lead the global recovery — it is China and other emerging economies.
China’s markets are for real — and so are the returns. Over the last five years, China’s markets have returned over +100% — even after the massive sell-off caused by the global financial meltdown. Over the same time period the S&P has actually lost money.
This is just the beginning. This report will show you seven reasons the Chinese economy has nowhere to go but up — and how to profit.
1. Incredible GPD Growth Driving Returns
On July 15, 2009, China’s National Statistics Bureau affirmed what we’ve expected all along. China’s 2nd quarter GDP came in at an impressive 7.9%. Recently, HSBC China economist Qu Hongbin went a step further, forecasting that the Chinese economy will grow +8.1% this year and expand to 9.5% in 2010. The increasing GDP numbers reflect that China’s recovery is much broader and more robust than most western analysts originally gave the red dragon credit for. This impressive growth comes not only from China’s massive $586 billion fiscal stimulus package, but from strong growth in consumer demand.
2. China Can Stimulate Its Economy Without Going into Debt
While the U.S. has had to print trillions of dollars to attempt to stimulate its economy, China’s story is much different. With $2.3 trillion dollars in reserves, China has been able to strategically stimulate their economy — without having to deficit-spend to do it. Even though the $586 billion Chinese stimulus package passed in November 2008 represents a whopping 16% of the country’s GDP, China hasn’t had to go into debt or print money like the U.S. did. This gives China an incredible opportunity to shore up the economy without damaging its future economic prospects.
3. China is Funding Global Growth
When the International Monetary Fund (IMF) announced they were considering issuing $50 billion in bonds to better finance aid to countries struck by the global financial crisis, they turned to China to purchase them. How times have changed. Two decades ago, the IMF would have been calling the U.S. to help fund the recovery. But with the U.S. economy crippled, China is the only industrial economy in the world that has enough reserves to actually do anything. Of course, China’s willingness to assist the IMF is both humanitarian and shrewd. As IMF Managing Director Dominique Strauss-Kahn said, “The crisis is certainly an opportunity to reshuffle the IMF’s governance, to see the new balance of powers in the world.” Clearly, China’s extensive reserves give the country the opportunity to exert its power over the entire new world economy.
4. China is Moving the World Away from the U.S. Dollar
Not only is China taking advantage of its economic strength to gain leverage in the IMF, it is also pushing for a move away from the U.S. Dollar as the world reserve currency. As the largest holder of U.S. dollar reserves in the world, China has a lot of reasons to be concerned with the value of the U.S. dollar. Chinese officials are watching very closely as Washington desperately spends to resuscitate the U.S. economy. In an effort to diversify away from the U.S. dollar, China has been buying gold, oil, and other dollar denominated commodities necessary for its growth. If the value of the U.S. dollar declines, the value of China’s new assets will increase. In one easy step, China has not only helped its strategic growth, but it also created a hedge against Washington’s shenanigans.
5. China is Creating a Marketplace for its Currency
Since December 2008, China’s central bank has signed bilateral currency swap agreements with six different countries – including Argentina, South Korea and Indonesia — worth $95 billion dollars. The countries that participate in these swap agreements can use Chinese yuan to buy goods and services in China. With these agreements, China has created a market for its currency without ever having to put it into the open market. China will likely continue to extend these swap agreements with as many countries as it can, until one day the world wakes up and realizes China has created a global marketplace for its currency without playing by the rules.
6. China Has Room to Grow
While we in the West grapple to keep up our inflated standard of living, China still has plenty of room to grow. Annual per-capita income in China is only $6,000 — compared with $47,000 in the U.S. The sheer size of China (1.3 billion people) and its increasing prosperity is an enormous force that can’t be ignored. Remember, China is not some backward third world economy. It is currently the third largest economy in the world. China’s economy will surpass that of the United States by 2035 and be twice its size by mid-century, according to the Carnegie Endowment for International Peace.
7. Global GDP Growth is Shifting East
As the global markets begin to mend themselves we will see global GDP share move from the west to Asia — led by China. The U.S., Canada, and Europe will only account for 49.4% of global economic output in ‘09, according to the Center for Economics and Business Research. Not only that, Western economies will decline to just 45% of global economic activity by 2012 — far ahead of the original estimates that predicted the West wouldn’t fall below 50% until 2015.
As China’s share of global GDP rises, so does its share of the global markets. From the end of 2003 to the end of July 2009, the NYSE’s share of global market cap shrunk -29%, according to the World Federation of Stock Exchanges. Over the same time, the Shanghai Stock Exchange increased its share of global market cap by +636%. In addition, by 2020 — just 11 years from now — China’s share of global consumption will be equal to that of the United States. That’s what happens when you introduce a prosperous economy to a population of 1.3 billion people.
How to Invest in China:
Not all Chinese companies are created equal, so we prefer using ETF’s to play the entire trend instead of choosing any individual companies. Remember, the ride won’t be straight up — China will have hiccups. But, we are staring at the leading edge of the investing opportunity of a lifetime and you don’t want to be left on the sidelines.
One of the most popular ways to invest in China is through iShares FTSE/Xinhua China 25 Index (NYSE: FXI), but I prefer PowerShares Golden Dragon Halter USX China (NYSE: PGJ). PGJ has a more broadly diversified portfolio of companies and sectors, with no more than 28% of the entire holdings in any one sector, and no more than 5.46% of the entire holdings to any one company. FXI on the other hand, has concentrated 51% of their entire holdings in the financial sector, and as much as 9.3% of the entire holdings in one company (China Construction Bank Corporation). That may prove be to genius over time, but as a measure of the entire Chinese market, we feel PGJ offers better diversification.
If you like income, take a look at Templeton Dragon Fund Inc. (NYSE: TDF) which is yielding 6.8%. Managed by legendary emerging markets fund manager Mark Mobias, TDF is a closed end fund focusing mainly on China (58.4% of holdings), but also on neighboring Hong Kong and Taiwan (29.9% and 11.4% of holding respectively).
If you have the stomach for more a little more risk, look at Claymore/AlphaShares China Small Cap (NYSE: HAO). The name “small cap” may be a little misleading. This fund is more of a blend between mid-cap and small-cap stocks. The fund is very well diversified between the different critical sectors in China and no single company represents more than 2.6% of the entire funds holdings.
– Sid Riggs
Contributing Editor
Money Morning
How to Trade China with ETFs
by Ron Rowland
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Right now, China is celebrating 60 years of Communist party rule. Most of the party-goers aren’t old enough to remember anything else, of course, but that isn’t stopping the nationwide festivities.
The sheer scale of China is mind-boggling! Just think about it …
- 1.3 billion people — more than 4x the U.S. population …
- 3.7 million square miles …
- And borders that touch 14 other nations!
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| Communist China Turns 60. |
Back in the 1970s, the Chinese government figured out that the whole “central planning” thing wasn’t working so well. And communist ideology gave way to a pragmatic mix of state ownership and entrepreneurial capitalism.
It worked … China’s economy is now 70 times bigger than it was in 1978, when the economic liberation began. Depending on how you calculate, China is either the second or third largest economy in the world!
The vast industrial base, concentrated in the coastal regions, is transforming China. Farm workers from the massive interior are drawn by the relative high pay of factories. New cities spring up out of nowhere to house these workers and provide for their needs …
… And now many of the products that were once immediately shipped to the U.S. or Europe are staying at home, snapped up by China’s newly-prosperous middle class.
A middle class in a communist society? Hard to believe, yes, but there really is such a thing in China now. And there’s an entire younger generation that now knows what they’re missing — and they’re working hard to reach the next level.
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| China’s new middle class is on a shopping spree. |
So if long-term rewards are what you’re looking for, China represents an amazing investment opportunity. But how do you play it?
First, recognize that anything China-related is going to be a roller-coaster ride, just as it has been the last few years. Therefore don’t invest unless you’re prepared for the bumps and jerks.
Second, know how much risk you’re taking. Individual Chinese stocks can deliver amazing profits, but they can be hard to trade. That’s why I think exchange traded funds (ETFs) are the best way for most investors to get involved in China’s hot market. And you have several choices — some diversified, some more specialized.
Here’s a quick summary:
Broad-Based China ETFs
U.S. investors can pick from four ETFs that track diversified Chinese stock market indexes:
- iShares FTSE China Index Fund (FCHI)
- iShares FTSE/Xinhua China 25 Index Fund (FXI)
- SPDR S&P China (GXC)
- PowerShares Golden Dragon Halter USX China Portfolio (PGJ)
Each of these ETFs takes a slightly different approach to constructing a China portfolio. FXI holds the 25 largest Hong Kong-listed companies that are available to foreigners. FCHI and GXC are similar but add some mid-cap stocks to the mix. They’re a little more diversified than FXI. All three are capitalization-weighted.
PGJ takes a somewhat different tack. First, it includes only Chinese stocks that have a listing on U.S. exchanges. Second, PGJ uses a tiered-weighting method, which results in the sector mix being a little different from the others.
Specialized China ETFs
If you want to get a little more aggressive, Claymore offers two China ETFs that have a tighter focus:
- Claymore/AlphaShares China Small Cap Index ETF (HAO)
- Claymore/AlphaShares China Real Estate ETF (TAO)
HAO is a good way to get exposure to small, fast-growing Chinese companies. These stocks tend to be less dependent on exports and more related to China’s domestic economy. TAO gives you an opportunity to profit from China’s real estate and construction boom.
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| China is growing like crazy. |
Inverse and Leveraged China ETFs
What if you think that China’s stock market has gone up too far, too fast, and is due for a quick drop? You may still be able to profit with ProShares UltraShort FTSE/Xinhua China 25 (FXP). This is a 2x leveraged inverse ETF. For instance, on a day when the underlying index goes down 2 percent, FXP is calibrated to move twice as much in the other direction — up 4 percent in this example.
On the other hand, if you’re bullish on the Chinese market, there’s the ProShares Ultra FTSE/Xinhua China 25 (XPP). This 2x leveraged “bullish” fund aims to give twice the daily move in the same direction.
The leverage factor for ETFs like these is reset daily, so the 2x math doesn’t always work for periods longer than a day. In other words, FXP and XPP are best used as tools by short-term traders, but if your timing is right you can make big profits from them.
Chinese Currency ETFs
If you want to bet on China’s currency, the renminbi (also called the yuan), you can do it with these two instruments:
- Market Vectors Chinese Renminbi/USD ETN (CNY)
- WisdomTree Dreyfus Chinese Yuan Fund (CYB)
There’s one key difference between the CNY and the CYB: CNY is actually an exchange traded note (ETN), not an ETF. Practically speaking, ETNs work much the same way as ETFs, but they’re actually a form of debt instrument. I wrote about the unique risks of ETNs earlier this year in my Money and Markets column.
Chinese law prevents the funds from directly investing in the renminbi, so they hold currency derivatives known as nondeliverable forwards. These are similar to futures contracts, which reflect a market’s expectations. As a result, these funds might not perfectly track the yuan.
As you can tell, there are plenty of ways to invest in China’s stunning growth story. I’ve only covered a few of them here, and ETF sponsors are planning many more. Do your research first, but don’t overlook China. The opportunity is too big to pass up!
Best wishes,
Ron
