The Chinese Economy: Boom or Bust?

As the Rational Investor, I’ve often commented on the remarkable resiliency of the United States economy. When faced with adversity, the American worker has the ability to work harder and more productively to carry us out of any decline in growth.

There is a good reason why most recessions only last a short period of time. We simply refuse to lose.

Well, if you think the American worker is determined, what does that make the Chinese worker?

In Robert Hsu’s China Strategy, Mr. Hsu notes observations of the Chinese worker in a recent trip to China. As he puts it the Chinese are determined to succeed, and there is an intense desire to improve their standard of living.

How else do you explain workers happily hammering away on a construction project at midnight or the waitress gladly serving away for the 50-cent tip? The implication is that they will do whatever it takes to make things happen.

In China, making things happen has resulted in double-digit growth over the last several years with little sign of slowing significantly. Even this year, a down year by their standards, growth is expected to come in at 9 or 10%!

Has the China Boom Gone Bust?

Despite this, stocks in China are down some 40% this year. Does that mean the China boom is over?

I highly doubt it, especially if you consider that the Chinese stock market had exploded higher in the last few years.

It is far more likely that the decline in Chinese stocks is mostly a correction. Call it a little profit-taking and nothing more. The fact that China’s economy is still expanding should provide a floor on valuations.

Capitalize on the Correction

The credit crisis in the United States provided the impetus for the selling. There is no sign that a recession in America will bring down the global economy. The headline may sound frightening, but the facts suggest that the world economy is doing fine.

That being the case, wise investors would do well to capitalize on the correction by buying shares. One of my favorite Chinese plays at the moment is China Mobile (CHN).

3G wireless will be huge in China, and CHN is positioned to obtain exclusivity of the technology until a foothold can be built. That provided CHN a huge opportunity that may include being the exclusive 3G provider during the Olympics.

At its peak in November of 2007, CHN traded for more than $50 per share. Today shares are below $35. That’s a healthy discount for a company that has the potential to grow at a very high rate.

Cell phone use in China is on the rise and not slowing. Even if the global economy slows, CHN should do well with the implementation of 3G technology.

At the end of the day, the Chinese civilian will do what it takes to ensure that its economy continues to grow. Buying into that growth makes Rational sense to me. I would view the current state as a pause with super-sized gains to follow.

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