Today the biggest emerging market of all — China’s economy, will release its official PMI data , which is likely to show the manufacturing sector continued to slow down in January. But it’s a quiet period at the moment in China as everyone is off to celebrate the Year of the Horse.
In Australia, we’re celebrating the year of the house…again. That maddening show, The Block, is back on TV, a painful reminder of our collective stupidity in thinking that we can speculate and renovate our way to wealth.
But 2014 just might throw a few surprises in the way of those celebrating the year of the house. That’s because there are ominous clouds now on China’s horizon. We won’t go into detail here, as we’re just finishing up a report on developments in China, with the opportunities and the threats that it will bring, for our Sound Money. Sound Investments subscribers.
Instead, we’ll tell you a brief story that is some sort of metaphor for China’s woes. It’s about Li Na, the Chinese tennis player who won the women’s Australian Open last week, at the age of 31.
She first turned professional in 1999, at 16 years of age. But it wasn’t until 2008, when she quit the national team and the state run sports system to go it alone, that success started to come her way. This gave her the freedom to pick her own coaching staff, but she would also be responsible for costs like travel and training.
It also meant she only had to give 8–12% of her winnings to the Chinese Tennis Association, instead of 65% under the state-based system she was under previously.
This decision to go it alone transformed her career. In 2010, she reached her first grand slam semi-final. In 2011 she won the French Open at the relatively old age of 29, becoming the first Asian to win a Grand Slam singles title. She’s now ranked number 3 in the world, with total prize money of over US$15 million.
There you have it. When you reward risk taking and hard work with a wealth redistribution scheme, you don’t get hard work. You get plodders, prepared to do the minimum because anything more is wasted effort. It’s better to speculate and try for easy gains — or be corrupt — than work towards long lasting wealth creation.
It shouldn’t come as a surprise then that the biggest economic and credit boom in China’s history has done nothing for the Chinese stock market. It’s still down more than 60% from the peak, reached way back in 2007.
Companies might look like they’re growing, but it’s profitability, not profits, that count for stock market performance. Companies that use capital efficiently reap the rewards. Those that abuse it are ignored. Clearly, there’s a lot of inefficient capital within China’s economy right now.
The one good thing that will come out of a China slowdown and economic rebalancing is that capital efficiency will (or should) increase. And that will eventually prove beneficial for China’s stock market.