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Over the past few weeks I had the pleasure of visiting different parts of mainland China. What becomes immediately apparent to any visitor to the major population centres in the eastern provinces is the large scale industrialisation and urbanisation that is occurring. Whilst I was in Beijing the Chinese Securities Regulatory Commission (CSRC) granted approval for the China State Construction Engineering Corp (CSCEC) to start building subscriptions for the world’s largest IPO this year. In addition to the wholesale government infrastructure spending and commercial construction boom that is underway, residential real estate prices have recovered dramatically and are rising rapidly. Noticeably, and often indicative of professional and investment interest, the top end bracket in property and rents are showing a renewed increase in strength.
What is often less noted is the growth that is occurring in the central and western provinces, away from the metropolises. The Chinese Government has been undertaking an initiative for several years designed at developing the interior and western parts of the country. Not dissimilar from the railways opening up the Wild West in the United States during the late 1800s, a huge amount of spending has been targeted at improved communication networks through many provinces.
The US centric news in Australia and continued reports regarding bearish sentiment and inefficient, unprofitable US companies tends to neglect the positive story of Asia. The chart below illustrates how well the top 25 companies in China have performed since the low in October 2008. Although it is worth noting that the index has most likely come too far too quickly, any pullback could be seen as an opportunity, rather than a turn for the bears.
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Of course, the real story seems to be from the resources. China has a tremendous amount of mineral wealth, boasting rich coal and iron deposits which are both key constituents in the manufacture of steel. Unfortunately for China however, the iron ore quality is not particularly good and the mines are not hugely profitable. In fact, with an iron ore price below the US$100/tonne mark it is not worth opening the mines. At time of writing and subject to some very heated negotiations between the Chinese government and Vale of Brazil, BHP and RIO, Iron ore is currently likely to settle close to the US$90/tonne mark.
This demand does not look likely to drop off anytime soon and puts those Australian companies that have exposure to China at great potential benefit. The big miners and possible further consolidation of the smaller mining companies (even takeover by Chinalco et al?) are all likely beneficiaries. This is regardless of the China Iron and Steel Association (CISA) and Rio Tinto incident and the ill feelings that have surfaced, as business and profit will inevitably be the chief consideration. Sims Group (SGM.ASX) is also likely to do well in the current climate of increasing ore prices and it can be seen how similarly the stock chart reflects the resurgence in growth of the Chinese economy.
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The resource sector and many reliant industries and social wealth that it generates (remember budget surpluses?) will all experience some degree of resurgence as long as China can maintain growth and development within the eastern provinces and stretching into the new areas of demand in the western provinces. Social and cultural conflict could become increasingly evident (such as the Urumqi riots) although the restrictive nature of the current administration should keep a lid on any major outbreaks. It's a bullish story for now.
Stay Sharp,
John Jeffery
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