China: Big Opportunities and Bigger Hurdles

On the verge of being pulled apart.

That’s what’s in store for the Liberals according to the mainstream.

I trust you know the outcome.

Victoria remains Labor.

Labor has won about 56 seats. All they needed was 45. The Liberals collected a measly 14 seats.

What’s surprising is the sheer volume of Victorians that turned from Liberal to Labor. Before the election, Labor had a one seat majority.

Now, they’re looking at a margin in the high teens.

Why did so many people switch over?

I think policy slogans had a lot to do with it.

Who doesn’t want more spending for jobs, education, schools, roads, and rail?

In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.

Why government shouldn’t control everything

The problem I have with the current political view is about government’s role.

Housing is unaffordable. Education is another pressure point.

The government should do more to solve these problems.

But I couldn’t disagree more.

I think the government is good at almost nothing.

What they should do is keep their sticky hands out of most things and let a free market come to equilibrium.

Take education for instance.

Dan Andrews is making TAFE free.

And when I say free I mean you and I pay for it through taxes.

At face value this is great. More kids are getting educated, increasing our number of skilled workers, in turn growing our economy.

But have you ever wondered why degrees are so expensive?

My wife’s Master’s Degree would cost her $100,000. And it’s because government subsidies have encouraged artificial demand for education, allowing providers to hike prices to ridiculous levels.

And as a result we have young kids graduating university up to their eyeballs in debt. If these subsidies were removed, hardly anyone could afford up-front payments for a $100,000 degree, forcing universities to drop their prices.

The same happens for a policy on affordable housing.

A common way to make housing affordable is to cap rents. Of course, there’s good intention behind rent controls.

The government just want to make sure families can afford to bring up their children with a roof over their head. Yet what ends up happening is far more families living in cramped apartments or sometimes on the streets.

Why?

Because the couple that were content with renting a one bedroom house now rent out a four bedroom house because they can afford it.

So demand rises significantly for larger homes, creating a lack of supply for those that really need it.

If you want to see just how good government are at solving problems just look at Venezuela.

The government controls almost everything.

They’ve got massive reserves of oil. And of course, the government wants prosperity.

But what do they have in Venezuela? Poverty and starvation.

The currency is also pretty much worthless now. It’s why the country is thinking of switching over to a controlled cryptocurrency.

China has its head down peddling into the wind

China is another good example to show just how bad good intentions can be.

The communist party wants prosperity for all. And they think socialist-type ruling is the way to achieve that.

The country rose to stardom on cheap labour and manufacturing prowess. They had a massive pool of capital, cheap labour and a cheap currency.

With such advantages China became rich off exports. But today China is quickly racing towards a problem.

It’s not debt. It’s their plans for the future. Manufacturing is a dying industry.

Manufacturing is done, and it is not anybody’s fault,’ Columbia Business professor Bruce Greenwald says.

The global productivity growth in manufacturing properly measured is 5% to 7% a year, and manufacturing demand is maybe 3% annually.

The only way places like Germany have been able to grow with manufacturing is at the expense of other nations.

Somebody has to gobble up that surplus.

Greenwald continues:

Everybody is trying to preserve their manufacturing sector and they are trying to do it by exporting. The Germans have managed to do it by destroying the rest of Europe through the fixed parity based on the euro.

Yet China doesn’t seem all that bothered.

They want to become the manufacturing power house for higher value goods. So the government is putting their head down and trying to peddle harder into the wind.

What they should do instead is de-regulate their industries. Take the governments hand out of the market and let Adam Smith’s invisible hand do its magic.

And this is the potential for the Middle Kingdom.

De-regulation and the free market will strengthen Chinese industries, businesses and improve living standards for consumers.

Yet this might not be reality anytime soon. And because of China’s control, analysts are grasping at straws of what might happen to stocks in the coming year.

How Aussie investors could potentially win big when China takes on Silicon Valley — Download your free report now.

So how does this benefit you?

It’s a mixed bag among Chinese forecasters. From South China Morning Post:

UBS Group and Citic Securities are bullish on Chinese stocks based on an outlook that involves policy easing and appealing valuations. However, Bocom International Holdings and Shenwan Hongyuan Group argue that equities will remain under pressure throughout 2019.

You could argue this all means nothing anyway.

Forecasters were far from accurately predicting 2018. Why would 2019 be any different?

It’s not hard to guess why analysts have cast such a wide net with their forecasts for the coming year. Hong Hao of Bocom International for example, believes the Shanghai Composite will trade between 2,000 and 2,900.

That implies a maximum gain of 12% and a potential loss of 22%. It also implies Bocom has a good of an idea as anybody on where Chinese stocks will go next.

But there is something you can take out of all this.

Right now uncertainty is high.

Not just in Chinese markets, but in Aussie and US markets too. It’s why stocks have come down in recent times.

So focus on the things that are knowable. Look at the businesses with certain prospects. Look at the stocks trading at silly values. As prices continue falling you’re bound to find opportunities sooner or later.

Your friend,

Harje Ronngard,
Editor, Money Morning


Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning readers 5 days a week.. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home among Matt’s incredibly exciting income plays.


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