Investor Alert - Appreciating China to its Fullest
Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors writes March 9, 2012 -
Wine expert and social media guru Gary Vaynerchuk attributes his ability to detect subtleties in wine that others might not recognize because of his unique taste-testing as a teen. Because drinking wine was illegal, he says he tasted the flavors associated with wine instead.
For investors, an appreciation of China requires a similar comprehensive analysis.
One significant subtlety that seems to be overlooked by investors today is China’s macro policy strategy. Professor Stephen Roach in the Financial Timesthinks the country has been "doing a far better job in managing its economy than most give it credit." Its actions have been deliberate and purposeful, and, most important, successful. He points to measures that China enacted to lower food inflation, along with the numerous times the country raised required reserve ratios and policy interest rates as illustrations of China’s increasing “prowess” in stabilizing its economy.
The positive results of the government’s actions have a delayed effect, only to be detected a few months later. For example, the chart below shows how the food and non-food consumer price index (CPI) have declined on a year-over-year basis over the past several months. CPI is now at its lowest level since July 2010, says CLSA.
With inflation now under control, China is stocked with other possible monetary policy actions to help growth in 2012, as opposed to the central banks of the U.S., Europe and England, which have run empty. “They have followed the Bank of Japan and taken their short-term policy rates down to the zero bound,” Roach says.
Perhaps the sommeliers have become the students: Rather than the developed countries’ central banks providing directives to China on ways to grow its economy, maybe it should be the other way around. Roach says that China “offers some lessons in macro policy strategy that the rest of the world should heed.”
Roach concludes that “long focused on stability, [China] is more than willing to accept the short-term costs of a growth sacrifice to keep its development strategy on track.”
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