Paul Krugman is worried about China: time to buy

The outlook for China may not be as gloomy as everyone thinks, says John Stepek. Here’s why - and how you could profit from a Chinese turnaround.


China: not as doomed as everyone thinks

New York times columnist and Nobel-prize winning economist Paul Krugman is worried about China.

"China is in big trouble The country's whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be."

I'm sure Krugman is a smart guy. And he's really only making the same points that early China bears were making to much derision from the bullish majority two or three years ago.

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However, we've never knowingly agreed with him on anything.

So I'm ever more persuaded that however bad the outlook is for China, it's not as bad as everyone now seems to be expecting.

And that suggests there are good opportunities to profit by betting against the consensus

Stop the press! Government embraces capitalism

For a glimpse of how China might not be quite as doomed as everyone thinks, check out their latest mini-stimulus' package.

This was announced this week, and markets were quite disappointed by the move. This isn't China printing a gazillion tonnes of money as it did in 2008/09. We won't see a flood of cash driving asset prices across the world much higher.

But from China's point of view, this is a far more sensible stimulus. It actually has a chance of helping the real' economy, rather than just making speculators happy. And if your key goal is social harmony for want of a better word then that's the way to go about it.

The package temporarily scraps taxes for smaller companies. It also cuts through some of the red tape around exporters. As the FT points out, bypassing government like this is a smart decision. "The 2008 stimulus was largely channelled through local governments, which used the money to finance unproductive projects."

By putting money in the pockets of entrepreneurs, China is encouraging the sort of growth it really needs: growth that comes from investment in projects that actually pay for themselves. This is what's known as supply side' reform. In short, what China is doing here is stepping away from state-directed investment, and towards more efficient allocation of capital.

A step towards capitalism and away from central planning? That's quite a revolutionary step in itself, particularly when the West is turning in the opposite direction. The British government, for example, has promised to cut red tape, but in truth, small businesses in our country are being suffocated in the name of propping up house prices.

Pretty contemptible really, and you know I could rant about it for hours, but let's get back to the point in hand.

How to profit from a Chinese turnaround

This is a tiny step for China. In the face of the country's bust banking system and its other huge problems (water shortages, social unrest, dreadful demographics, a horrendously imbalanced economy), it doesn't seem like much.

But when everyone else has such a downer on China, these little glimmers of light can be all it takes to spark a bit of a turnaround.

So how do you play it? Not through Chinese stocks. As we've mentioned before, Chinese politicians couldn't give a monkeys what happens to the local stock market. The Chinese people quite rightly already see it as a less entertaining version of a night out in Macau's casinos.

So if the market tumbles as it has it's not the headline-grabbing, revolution-starting event that it might be in say, the US. (If you think that's a terrible exaggeration, ask yourself this if the S&P 500 was currently sitting at 2009 levels, as China's main market is, do you think the incumbents would stand a chance at the next election?)

This is the main reason why I'm not keen to invest in Chinese stocks. As stakeholders' in China's economic model, minority foreign shareholders probably rank somewhere down with the cockroaches in terms of relevance.

Of course, every market has its price and China might be getting there. But not quite yet.

Instead, I'd be more interested in playing this through the mining sector. I suggested a number of tips in a Money Morning last week. And in the current issue of MoneyWeek magazine, we look in more detail at the sector if you're not already a subscriber, you can subscribe to MoneyWeek magazine.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.