The Man Who Dares to Bait the China Bears

The last place on earth you’d expect to find a shortage of labour is India. But, believe it or not, that’s exactly the problem that exists in the agricultural sector, as revealed by The Australian this week. Just like in China, India’s poor are upping stumps from the villages and heading for the bright lights of the city. The usual line from here is to lustily imagine who can sell to all these potential urbanites. But investors might like to keep an eye on what they leave behind: fields that need still need to be sown and harvested.

Take this from the Australian: ‘The labour shortage has created a potentially vast opportunity for farm-equipment makers in one of the last major bastions of old-fashioned cultivation. Second-quarter tractor sales in India rose about 25 per cent from a year earlier.‘ International agriculture companies are looking to cash in on the shift. Hell yeah, we’re talking tractor sales and other mechanised farm equipment.

Don’t laugh; agriculture might be one bright spot in a bleak landscape. The DR‘s own Nick Hubble over at The Money For Life Letter caught a good chunk of the rise in dairy producer Warrnambool Cheese and Butter’s share price. The company is in the midst of a bidding war. We haven’t seen one of those for a while. Nick’s banked his profits and is now revealing his next move here

Speaking of the whole ag sector reminds us of what Phil Anderson said in a webinar back in early September: ‘We have a situation at the moment,‘said Phil.’I think it’s a world first, where the world is seeing record harvests of grains, wheat, corn, and soybeans, and prices for those commodities have gone sideways at high prices. I find that unprecedented. So what that means is if in 2014 or 2015 we get harvests that are even remotely poor, it could skyrocket food prices on futures markets in the US.

Phil, as you may know, is an investor and economist who’s bullish on US real estate, and, as a derivative of that cycle, Aussie property. Phil’s analysis is not quite like anything you’ve ever seen, or at least we’ve seen. You can see why here. But there’s no doubt he’s a keen student of finance and markets, including commodities. Watching the ag commodities at this point looks like a smart move.

India needs to increase the productivity of its agricultural sector to produce more food. So does China. That was one takeaway we took from the book China’s Urban Billion: The Story Behind the Biggest Migration in Human History. Phil suggested reading the book, which is why we bring it up today. The author is Tom Miller, an Englishman who lives in Beijing and is Managing Editor of the China Economic Quarterly.

Here’s his take:

Raising incomes for the hundreds of millions of farmers who wish to stay on the land is a necessary counterpart to China’s aggressive urbanization policies. Unless agricultural productivity increases, the supply of farm produce will not keep up with demand, and inflation will wipe out the gains from higher incomes.

The book is 12 months old now, but is as relevant as ever. China is careless with its land because local governments have distorted incentives to acquire cheap rural land and sell it off at high prices to developers. It’s one of the few ways they can finance their social spending. Local taxes are sent to the central government in Beijing. It’s all part of China’s screwy fiscal system. Even so, Miller is not a conventional bear on China.

In fact, his conclusion is that investors who fear a property bubble in China have got it the wrong way around. He says China isn’t suffering from too many houses, it has too few. That’s a bit of a mind bender if you think of Chinese real estate as nothing but a massive Ponzi scheme. But Miller lays out a convincing case and mostly poo poos the whole ‘ghost city’ meme that’s been doing the rounds since 2009. Unfortunately, he doesn’t delve into the commercial real estate sector much.

That’s not to say, by the way, that he’s starry eyed about China’s economy. He admits there’s plenty of problems. But Miller’s main focus is actually not the real estate market or local government land sales. Most of the book is spent dissecting hukuo, China’s internal registration system and how it divides Chinese society between a privileged urban elite and disenfranchised migrant workers. This is where the trouble will brew if there is a major economic downturn.

By migrant workers, he means rural Chinese heading to the cities. These are the people who are supposed to launch China’s consumer economy. But Miller says that’s a pipe dream unless the hukuo system is reformed because the migrant workers will become trapped in low income, low consuming lives stunted by the regime:

China’s urbanization numbers are very impressive, but they hide an unpalatable truth: a large chunk of Chinese urbanization is bogus. Up to 250 million people in Chinese cities do not live genuinely urban lives, because migrant workers from the countryside are not entitled to urban social security and face institutionalized discrimination in the cities.

Here’s how the cycle could perpetuate. Farmers become migrant workers. As migrant workers earn more than the subsistence farmers, they have some cash but hoard it because they have no safety nets and insecure housing. Consumption doesn’t rise but the savings, because of the way the finance system is structured, are still funnelled into infrastructure.

This is where you run into the objection that China has already overspent here on a gargantuan scale. Here’s how Miller counters it: even though China seems to overspend on infrastructure, it seems to need so much more. Cue frothing at the lips of some of the China bears.

There might be an opportunity there for investors. Chinese cities are spending big on mass transit systems to keep the number of cars down, to rein in China’s record-breaking pollution. 18 systems are under construction and 23 more are at the planning stage.

But the Chinese car market is still lucrative and automakers are cashing in. The challenge for the automakers is to get those cars as ‘green’ as possible if they want to hang on to their market. Australia Small Cap Investigator and Revolutionary Tech Investor editor Kris Sayce has identified not one, but two different ways companies are trying to bring down the weight of vehicles to cut emissions. Considering the dismal state of Aussie car manufacturing, you might be surprised to find the companies he expects to benefit trade on the ASX. But we’re pretty sure you’ll never guess. You can find one way here. Stay tuned for the latest.


Callum Newman+
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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