The One Lie You Must Ignore

Another day, another reason to hate China …

“Investors now worry about the economic outlook with no signs showing a recovery,” Li Jianfeng, an analyst at Caida Securities in Shanghai, told the Associated Press earlier this week.

Anyone want to guess at the most important word in Mr. Li’s analysis?

It’s now. Investors now worry.

With China, it seems investors are always worried about something. The handwringing simply never ends. If it’s not the government tightening lending standards in the housing market, it’s the government eradicating underground and unregulated lending. Or, it’s inflation that’s rising too slowly … or too quickly. Or, it’s GDP slowing to quickly … or growing so quickly that no one believes it’s real.

No matter what China does – or doesn’t do – Western commentators insist it’s a bad omen for the Eastern dragon. And, thus, it’s bad news for investors in Chinese shares, so it’s best to just get out.

I’ll call it “The Great Lie.”

I’m here to tell you, again, that China remains the place you want to have some of your money invested. Listen to the commentators and you will miss what still remains one of the greatest investment stories of the next two decades.

Here’s a perfect example of the mass-media’s China schizophrenia: Bloomberg on Tuesday posted a story headlined with: “Asia stock futures rise as China economic growth concerns ease.” Hours later, The New York Times posted a story with this headline: “China inflation data underscore weak economy.”

Which is it? You can’t have it both ways.

I have my personal opinions about this phenomenon. First, I think the West is so paranoid about the rise of China – and they have such a blind belief in Western superiority – that commentators either consciously or unconsciously look to undermine the country. Second, having been a financial writer at the highest level for 17 years, I know a great preponderance of my peers in journalism are simply ill-versed in economics and even less versed in China. Worse, they gather their information from sources who, also, often have little knowledge about China and are just spouting off at the mouth – though those verbal eruptions are dutifully reported as thoughtful analysis.

For mom and pop American investors, it’s a huge disservice.

China, warts and all, still represents one of the greatest wealth-building opportunities that today’s investors will see in their lifetime.

Long-Tail Trends Are More Important Than Daily Data Points

The day-to-day vacillations in China are nothing but noise. Don’t listen to them.

Instead, pay attention to the long-tail trends – the movements that mean the most to investors who look out beyond what the commentators are yapping about today.

For instance: China’s announced plan is to move 400 million rural residents into urban cities over the next decade. That’s 40 million people a year, the equivalent of filling up New York City five times annually.

That’s a trend … and a very big trend, at that, when you consider the demands that puts on everything from concrete and steel needed to build the necessary infrastructure (apartments, roads, schools, hospitals, shopping centers), to restaurants, supermarkets, housing – the list is nearly endless.

China, as well, is moving toward freer financial markets. That, too, is a trend that will create substantial profits for investors.

The government will allow the local currency, the yuan, to float on global markets just as the dollar does. As part of that, China will do away with its bifurcated A-share and B-share stock markets that separate domestic investors from foreigners. When that happens, A and B shares will converge and the huge price gap that separates them will vanish, with many B-share stocks rising dramatically to meet up with their A-share counterparts.

Both of those trends are huge opportunities for patient investors. When the yuan floats, it will ultimately rise against the dollar, and likely sharply. And when the A and B shares converge, big profits await for investors in certain, high-quality B-share stocks.

Embrace the Dragon: Make a Fortune

One last long-tailed trend is utility infrastructure, meaning the improved water resources and greater reliance on natural gas.

The International Monetary Fund reports that China’s epically filthy water shaves seven full percentage points off its potential GDP every year. Meanwhile, environmental analyses from numerous groups routinely note that China’s dependence on coal to drive industry and power is the root cause of the country’s chronic air pollution and the reason life expectancy is at least five years shorter than it should be.

China’s government knows this and is spending hundreds of billions of dollars addressing both issues.

For investors who own companies that build or operate waste-water treatment plants, the future is very bright. Same goes for those who own the stocks of companies that are beginning to exploit China’s vast reserves of untapped shale gas, or companies like ENN Energy (Hong Kong 2688) that run natural gas pipelines (subscribers to The Sovereign Individual closed their positions in ENN earlier this year for a gain exceeding 159%).

The ebbs and flows of Chinese GDP or inflation or home prices have little bearing on these kinds of long-tailed trends. Sure, China’s economy will bounce around and wobble, just as America’s does, and ours is decades more advanced.

But at the end of the day, China’s urbanization effort will create a middle class that far outnumbers America’s. China’s financial restructurings will unlock value. And China’s environmental efforts will create vast wealth for investors.

You can listen to the mass-media’s daily teeth-gnashing and fear the Eastern dragon. Or you can look to the future that is obvious and embrace the creature and make a small fortune as the country continues on its long-term path to prosperity.

It’s clear where the real opportunity lies.

Until next time, stay Sovereign …

Jeff D. Opdyke