China's Latest Growth Fuelled By Domestic Demand Not Foreign Buying

Bill Bonner - Wed 23 Apr, 2008

China's latest growth announcement masked an even more important detail

*** More and more indications suggest that there is a kind of decoupling happening. That is, the new economy of the Far East (and to a lesser extent Latin America and Africa) is separating itself from the old economy of Europe and North America.

Prudential Insurance, Britain's largest insurer, says that Asian sales are now more than half its business. The company can grow, it points out, even with falling revenues from Europe and North America.

Meanwhile, colleague Manraaj Singh tells us that China's latest growth announcement masked an even more important detail. The headline number - GDP growth over 10% - is breathtaking. But what is more interesting about it is that it is happening while exports to the developed world are actually going soft. That is, the growth is being fuelled by domestic demand not foreign buying. This is not to say that emerging markets no longer need their Old World customers. Just that they don't need them as much as before.

*** Our India expert, Ajit Dayal, paid us a visit last week in London. In the first two and a half months of this year, the Indian stock market got hit hard - the BSE 200 lost 32% of its value. We checked Ajit's wrists for signs of slash marks and found none.

"I'm not the least bit worried," he told us. "The India Thesis still stands. Indian GDP should post average growth of 6% per year for the next 10 years. Our stocks will give investors a risk-adjusted return of 15% to 20% per annum. That will make it possible for an investor to multiply his investment four to six times over the ten year period."

Ajit points out that while Indian stocks dropped sharply, they were coming down from a crazy high. A big rush of foreign money in 2007 had sent the BSE skyward. Even after correcting by 30%, Indian stocks are still ahead for the 12 months ending March 19th by 45%.

"Look around your house," Ajit suggests. "You will find few things labelled 'made in India.' India gained little from the housing boom in America. And it will suffer little from the housing bust."

What does affect Indian equities, though, is the movement of foreign capital. But foreign investors are generally light on Indian shares, while local investors - especially mutual funds - are taking bigger and bigger positions.

*** Pity the working man. The average working stiff in America now earns less than his counterpart in France - $38,000 in the United States as compared to $41,000 in France. Presidential candidate Barack Obama says the masses in Pennsylvania are "bitter" about it.

Pennsylvania is an industrial state with plenty of unions. We remember visiting our Pennsylvanian cousins in the '50s. They worked in the steel mills south of Pittsburgh and enjoyed a lifestyle that seemed luxurious compared to our own. At the age of ten, it appeared to us that there was a lot more money in factory work in Pennsylvania than there was in the tobacco fields of Maryland.

But factory work peaked out in the late '70s...says the New York Times, when an hourly manufacturing worker could expect a wage of $20 an hour (adjusted to '07 dollars). Ever since, factory wages have been going down. So have hourly wages generally. Now, a factory worker cannot really expect to live a middle class life, reports the NYT, unless he brings home $41,600 (about $20 an hour). But fewer than 20% of them do.

*** Seeing the handwriting on the wall, people flooded the colleges and universities in the last half of the 20th century. If you got a degree, you wouldn't have to work in the mills, threatened parents. You could go to work in the office - where it was air-conditioned and you got to flirt with the secretaries. But now comes news that even people with four years of college often do not earn enough for middle-class status. And worse - a study reported in the NYT says that even a degree from an elite college is no guarantee of higher wages.

Which raises a good question - why bother to pay for an expensive college...or even, why bother to go to college at all?

We raised the issue with Henry - our 17-year-old.

"What would I do if I didn't go to college?" he answered. "And besides, if I want to be a doctor, I have to go to college. And if I do go to college and discover I don't want to be a doctor, at least I'll have the choice to not become a doctor. But if I don't go to college I won't have the choice to become a doctor."

Good point.

But what about the people who have to scrimp and save to send their children to college? Student lenders are becoming tight, say the papers. And the old Bank of Home Equity has closed its doors.

Wherever they get the money, there will surely be some disappointments in the results. The New York Times mentions a couple whose boy wanted to go to a private college rather than the State U., because the private school had a "good pre-law program." For that, the family was willing to pay an extra $80,000 - over the four-year program.

We don't know what they think they got for their money. But we have a strong hunch it was - zero. We spent three years in law school. As far as we can tell, there is no such thing as "pre-law." In the beginning it's all reading, writing and thinking - which any education should prepare you for - then, you move on to advanced hoodwinking, contractual obfuscation and ambulance chasing.

"Do you deny the allegations?" the judge once asked The Kingfish in an episode of the '50s TV show, 'Amos & Andy'.

'Not only does I deny the allegations," replied The Kingfish. "I resents the alligator.

Regards,

Bill Bonner
For The Daily Reckoning