Wednesday, August 19, 2009

China market correction continues. What should you be doing?


This is not China of the past. China of the past would have sat idly by during a correction and waited until the United States did something. That's because any correction would have almost certainly been brought on by some speed bump in America. In the past China's policymakers wouldn't have been concerned, or for that matter, even prepared, to deal with a correction that was brought about by factors such as a U.S. recession.

Now they are.

Over the past two years we made it clear to China--emphatically clear--that their growth and prosperity is not only in their own hands now, but that they have become newly responsible for the world's economic leadership as well.

We have ceded the mantle of economic leadership to China and they know it, or at least they are coming to know it.

But like anything else that is unfamiliar to you, it takes some time and practice before you are really skilled and adept at handling a new situation. China is a quick learner, however: After watching the U.S. flounder for more than a year without doing much of anything, it enacted a bold stimulus that was equal to 15% of its GDP or, fully, three times as big as the one that we saw in the U.S.

That immediatelly halted the steep selloff in the Chinese stock market and turned it on a dime. Their market then proceeded to double in the course of 5 months! That's action!!

But just as China was initially not comfortable sitting in the king's throne (economically speaking), neither was much of the rest of the world. This is understandable because, after all, the U.S. held that position for more than 60 years. And even if some people hated the U.S. and wanted to see it removed by any means, it was just habit for folks to expect America to occupy that seat.

Moreover, no one thought the U.S. would abdicate! NO ONE!! And this certainly applied to China who many thought to be a rival of America. Would the United States literally hand its economic power over to this brash newcomer and fierce rival? Not in a million years, at least that was the thinking.

So the whole thing takes some getting used to, especially for China.

(It's like you're in a fight and you are beating your opponent, then you just lay down. Even your opponent doesn't quite know what to do!)

Perhaps I have gotten a little off track, but but what I am trying to explain by way of my little allegory is that you ought to be buying the pullback in China stocks that is occurring now.

China's recent sensitivity to critism over rapid loan growth caused it to digress and resume some of its outmoded behavior of the past. It was not the behavior of a leader. When the People's Bank of China and other Chinese monetary authorities started to rein in reserve growth and take steps to cool lending they were behaving on past form. Psychologists call it "regresssion."

But this regressive behavior has now triggered a market correction and the Chinese have been woken up with what feels like a bucket of ice water in the face. Don't expect them to stand there and let this downturn continue for any length of time. And do yourself another favor...DON'T expect them to wait for the United STates to get them out of it.

When the U.S. assumed the mantle of economic leadership from Britain at the end of WWII it didn't do everything right from the get-go. There were times when America regressed to its past behavior...a behavior similar to that of a young child or monarch-in-waiting.

These periods of regression brought on market corrections, dips, recessions or other unpleasant events, but they all proved to be temporary because with each stumble the U.S. gained knowledge and confidence and the perception of its place in the world became more clear. Challenges that had once been insurmountable alone were soon met with single-minded, swift and decsisive action and the nation prospered...and the world prospered.

China today is like the U.S. at the end of WWII with one did not earn its place of leadership in a trial of freedom, fire, conquest, courage, innovation and raw power. It was handed it on a silver spoon. That's all the more reason why the People's Republic still feels a bit awkward and uncertain about being in this spot. You should expect to see hesitation and flashes of timidity from time to time. Regressions will occur and so will market corrections, however, just like in the case of the United States, with each test and with each new success, China's experience, knowledge and confidence will grow and with that will come greater prosperity and leadership.

Investors who bought into the pullbacks that occurred as a result of the early mistakes of the young, "King America" went on to make fortunes not only for themselves, but for their heirs over successive generations.

You have this chance now. Admittedlly, I know it's hard as an American, especially if you're a "Baby Boomer" like me, to put your faith and confidence and hard-earned money into some foreign country, but you have to overcome that fear or that mental block if you want to grow rich in the new emerging opportunity of a lifetime.


Matt Franko said...

Mike picked this one off

"On the other hand, Hurd (HP ceo) said business in China is vibrant, and he said not to believe the recent scare of a slowdown there. “China’s performance lifted our entire Asian region,” he said. “It is doing very well.”

As far as the U.S. is concerned, Hurd stopped short of predicting a true turn around, instead using the word “stabilizing” very often in our conversation."

The China market seems to be working well for Hewlett-Packard currently, US is muddling through.

mike norman said...

Yes, muddling through as a consequence of choice, but I guess that's better than totally collapsing. Still, it's a shame.