Tuesday, January 15, 2008

An old Chinese myth

I love it when prevailing myths are exposed, especially when I have my own doubts but don't have the wherewithal to prove otherwise. So it was no surprise that I throughly enjoyed this article from last week's Economist.

The myth in question deals with China's dependence on exports. The most often quoted statistics is the ratio of total exports to GDP which is something like 40%. Herein lies the fallacy: "exports are measured as gross revenue while GDP is measured in value-added terms". The article quotes a study by UBS that conclude the "true" export share is just under 10% GDP.

This is highly pertinent to resource investors as China is by far the dominant user of commodities. If this conclusion were true, it would be a strong argument to continue holding base metal and energy companies or even add to them as others worry about the prospects of global growth in the face of a US slow down.

It has to be noted that this argument says nothing about how Chinese financial markets may react in the short run. Stocks in resource companies should be a safer bet than Chinese stocks which may have troubles of their own. And I'm not saying this because Asian stocks are awash in red tonight with the exception of Taiwan after a landslide victory by the China-friendly KMT in the parliamentary elections.

I should have been clearer in my characterization of the EEM chart the other day. It's in a triangle rather than a clear downtrend as there isn't lower lows. But if we break below 141, then look out below! (See Martin Goldberg)