Don’t Buy Into Pessimism Over China — the Free Trade Agreement is the Boost We Needed

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The Federal government has signed off on an historic free trade agreement with its Chinese counterparts. The FTA was one of the most ambitious undertakings in our nation’s history when it was first unveiled a decade ago. Now that it’s official, it stands as a crowning achievement that could push the Aussie economy back on track.

Forgive me if I sound too excited about this whole development. But we’ve been searching for answers to lift some of the gloom surrounding the economy — and this could be what we’re looking for.

I’ve rarely subscribed to the growing speculation that China’s economy is teetering on collapse. It’s not that people are wrong to raise concerns, but they often miss some key points.

You would’ve heard the same questions no doubt. Aren’t economic growth rates falling? Haven’t stocks risen to dangerous, bubble-like, levels? And what about housing; isn’t demand dropping quickly?

Let’s take a moment to look at the facts.

Yes, it’s true that the Chinese economy is slowing from its peak of 14% in 2007. But it’s still growing at a ‘lazy’ 7%. That figure, in the context of China, is something few of us have a true appreciation of. There is still an astounding potential for wealth creation from China.

While stocks are rising rapidly, the Chinese government is pushing investors towards equities as a way to wean people off housing investments.

But that also partly explains why demand for housing is cooling too. As China shifts from an export to consumer economy, demand for workers across manufacturing industries will continue falling. China is already becoming a more expensive option for low cost manufacturing compared to other Asian nations. As this unfolds, it will soften rural migration to cities, which has been the main driver of housing growth.

Whatever your opinions are on China’s economic prospects, some things are undeniable. China is both our largest trading partner, and the second largest economy in the world. This gives it a unique position in providing opportunities for Aussie businesses across a range of sectors.

It also means that any market pessimism over the FTA with China is misplaced. But don’t take my word for it. The Daily Reckoning’s Phillip J. Anderson puts this cynicism down to lazy tabloid analysis.

As an expert of international economic and market cycles, Phil is confident the mainstream has this one all wrong. Take the concerns over China’s real estate, and how it relates to its shadow banking system. Some economists think it could potentially lead to a 2008 style meltdown — Phil disagrees. Here’s his take on it:

Shadow banking activity has grown markedly in China since 2008, although it’s nothing new. It is this activity, however, the media highlights as being at dangerously risky level.

In China, the government regulates interest rates. Presently, a bank can charge a maximum [5.1%] when it lends money.

Depositors receive a mandated 2% or thereabouts on their funds. That gives Chinese banks [with majority government stakes] a very cheap funding base and a large profit margin’.

That means that China has relatively strict lending regulations. Any business or individual that can’t get a loan at a bank will opt for non-banking lenders. These are typically referred to as micro-credit lenders. Phil explains:

Micro-credit firms may charge you a rate of interest up to 24% per annum plus fees. This may sound high, and it probably is, but in China if you can turn the money over several times a year from that loan. You can do quite well with such high rates. Reports are highlighting this [wrongly] as risky’.

The law requires that all micro-lending firms must put in substantial capital reserves as a starting base. What’s more, they can only lend 50% above this base. So, if a micro-lender puts in 100RMB as starting capital, they could only lend out 150RMB. While these rates are much higher than the 6% maximum banks charge, capital controls ensure that micro-credit lenders don’t pose a systemic risk.

As Phil says, micro-credit firms also rarely lend against real estate. Moreover, they also take an interest in borrower earnings and cash flow to weigh against the risks. It sounds like they take banking more seriously than actual banks.

The concerns over China’s shadow banking system are unwarranted. Their lending activity is simply not irresponsible enough to set off a financial crisis resulting from a real estate collapse.

Phil wants to show how you can profit from the media’s ignorance. I urge you to read the rest of his report to find out why the pessimists are wrong on China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.

The benefits of the Australia-China free trade agreement

The free trade agreement is set to remove a number of barriers, like tariffs, across a range of industry goods and services. Currently, Aussie businesses are slapped with tariffs of up to 40% on goods they export to China. That will be a thing of the past.

The government says the deal will inject billions into the economy, boosting jobs in the process. According to Prime Minister Tony Abbott, it could lead to the creation of hundreds of thousands of jobs. The crazy thing is that he may not be exaggerating. If businesses can come to terms with marketing themselves effectively to Chinese consumers, the sky’s the limit.

Every sector from banks and tourism, to education and healthcare, could stand to gain massively. Healthcare might be the biggest winner in the long run. Just imagine the possibilities.

China will have 500 million people over the age of 50 by 2050. For mature Australian healthcare providers, that’s 500 million potential new customers. That’s just one example. But it gives you an insight into the possibilities. This agreement could give the Aussie economy the kick up the backside for the next few years — maybe decades.

But it’s not just businesses that will benefit from this deal. Consumers will be better off too. Goods ranging from cars to electronics will all retail cheaper domestically as a result of the FTA.

And what does China get in return? Better access to our resources of course. China has an insatiable appetite for iron ore (used to make steel) and coal. That alone was probably enough to seal the deal on their end.

The truth is we’re small enough not to threaten their domestic industries. That’s why they’re comfortable opening themselves up.

But Australian companies will certainly be able to carve out a niche for themselves in a crowded market.

Mat Spasic,

Contributor, The Daily Reckoning

PS: Growth rates of 7% in China will present huge opportunities for Australia’s economy. The Daily Reckoning’s editor, Phillip J. Anderson, is bullish on China. He’s convinced China’s boom is only beginning, and that it’s set to last another decade. Both businesses and investors will still need to invest smartly in order to maximise their opportunities.

That’s why Phil has written a free report designed to show you how to invest confidently and successfully in China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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