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The Chinese Economy Charges Ahead in the Year of the Ox

Summary:
Happy Year of the Ox! Today China and a number of other Asian countries celebrate the Lunar New Year, also known as the Spring Festival. In pre-pandemic years, the Lunar New Year has been an opportunity for individuals and families to travel and visit loved ones. Millions of Chinese people took as many as 3 billion trips in early 2019, representing the largest annual human migration in history. As you might imagine, things look a little different in February 2021, more than 12 months into the global pandemic. Although China has mostly contained the virus, travel is largely being discouraged. Officials expect only 1.2 billion trips to be made this year by plane, train and automobile. That’s bad for families, obviously, but good for Chinese factories and exporters, some of which are

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The Chinese Economy Charges Ahead in the Year of the Ox

Happy Year of the Ox! Today China and a number of other Asian countries celebrate the Lunar New Year, also known as the Spring Festival.

In pre-pandemic years, the Lunar New Year has been an opportunity for individuals and families to travel and visit loved ones. Millions of Chinese people took as many as 3 billion trips in early 2019, representing the largest annual human migration in history.

As you might imagine, things look a little different in February 2021, more than 12 months into the global pandemic. Although China has mostly contained the virus, travel is largely being discouraged. Officials expect only 1.2 billion trips to be made this year by plane, train and automobile.

That’s bad for families, obviously, but good for Chinese factories and exporters, some of which are offering bonuses to workers who put in the hours over the holiday. New orders continue to be red hot following a record year for exports, proving again that China remains as the world’s factory floor.

China’s Export Business Surged to New Highs in 2020

The Asian country ended 2020 with a record trade surplus of some $78 billion as demand for medical supplies, electronics and household goods surged. For the first time ever, China’s total global exports amounted to 14.3% of all global trade, according to Morgan Stanley. China is now the single most important trading partner to an incredible 64 countries, up from only five in 2001. For comparison’s sake, the U.S. is the top trading partner to 38 countries, down from 60 in 2001.

The Chinese Economy Charges Ahead in the Year of the Ox
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It’s for this reason and more that I’m extremely bullish on the country and believe it to be one of the most attractive regions to invest in going forward. I find it remarkable that China responded to the virus without having to break the bank with excessive stimulus. Whereas the U.S. is likely to spend some $10 trillion in monetary and fiscal policy by mid-2022, or about 50% of its GDP, China’s cumulative spending over the same period is estimated to be only 6% of GDP.

China Could Overtake the U.S. as the World’s Largest Economy Earlier Than Expected

Speaking of GDP, China was the only major economy to see economic growth in 2020. It expanded 2.3% while the U.S. economy shrank at about the same rate.

This divergence could mean that China’s economy may overtake that of the U.S. much earlier than expected—by as soon as 2026, according to one estimate.

The Chinese Economy Charges Ahead in the Year of the Ox
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Take a look at the chart above. The spread, or difference, between the size of the U.S. economy and Chinese economy has been tightening since the mid-2000s, but I believe we may see it tighten further to an all-time record low by the end of 2021 as economic growth in China continues to outperform.

S&P Global Ratings expects China’s GDP to expand 7% this year. I’ve come across even higher forecasts—some as high as 8% and 9%—so this seems a little conservative to me. As for the U.S., the Congressional Budget Office (CBO) is looking for a 5.6% annual growth rate in 2021, which, if accurate, would be the fastest rate since 1983.

The Chinese Economy Charges Ahead in the Year of the Ox
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China Now the Top Destination for Foreign Direct Investment

Is it any surprise, then, that businesses are scrambling to get access to the country?

According to the United Nations Conference on Trade and Development (UNCTAD), China was, for the first time ever, the number one destination for foreign direct investment (FDI). Inflows into China rose 4% in 2020 compared to the previous year, marking the second highest rate following India, even as total FDI across the globe collapsed 42% due to the pandemic. Businesses poured $163 billion into China, making it the top country for FDI ahead of the U.S., which attracted $134 billion. That amount represents a nearly 50% plunge from 2019. Developing economies like China now account for more than 70% of all FDI, according to the UNCTD.

The Chinese Economy Charges Ahead in the Year of the Ox
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To clarify, FDI is not the same as investing in the shares of a foreign-based company. Examples of FDI might include mergers and acquisitions (M&A), manufacturing, logistics and more.

China itself has been making massive foreign direct investments through its One Belt One Road (OBOR) initiative, the country’s unprecedented infrastructure strategy across as many as 70 countries across four continents. Last year, renewable energy such as wind and solar made up a bulk of the OBOR’s energy investments as countries accelerate their shift away from fossil fuels. As a share of China’s total energy investment, renewables were 57%, or $11 billion, in 2020.

Asian Markets Were Top Performers in 2020

There’s some disagreement about whether FDI has any impact on stock market performance, but it’s worth pointing out that Asian markets outperformed their global peers in 2020 and continue to show momentum in the new year. Among the best performing markets were South Korea, Taiwan and China, which helped the MSCI AC Asia ex Japan Index end 2020 up about 20%, ahead of the S&P 500 and FTSE All-World Index. Denmark and Sweden rounded out the top five best performing markets.

The Chinese Economy Charges Ahead in the Year of the Ox
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It’s not just foreign investors who seek exposure to the country. In December, the Chinese mainland stock market added a head-spinning 1.62 million new investors, more than double the amount recorded in the same month a year earlier. For all of 2020, the Chinese stock market added 18 million new investors to its ranks, or about 1.5 million new accounts a month.

Eye on Metals

2021 isn’t just the Year of the Ox; it’s the Year of the Metal Ox.

Which is appropriate since metal prices this year should remain heavily supported by demand from China. On top or the ongoing OBOR initiative, the country is expected to spend $1.6 trillion through 2025 on advanced tech projects like 5G networks and electric vehicles (EVs), which will require biblical amounts of rare earth metals, nickel, copper, aluminum and more. This year, sales of EVs are projected to reach 1.8 million units, a 40% increase from 2020, which should be supportive of lithium prices.  

Speaking of metals, we have a webcast coming up on March 10 that I hope you’ll join us for. The topic will be gold and cryptocurrencies and how there’s room in your portfolio for both. Register for this free event by clicking below!

The Chinese Economy Charges Ahead in the Year of the Ox

Gold Market

This week spot gold closed the week at $1,824.23, up $10.12 per ounce, or 0.56%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 0.61%. The S&P/TSX Venture Index came in up 4.38%. The U.S. Trade-Weighted Dollar fell 0.66%.

Date Event Survey Actual Prior
Feb-10 Germany CPI YoY 1.0% 1.0% 1.0%
Feb-10 CPI YoY 1.5% 1.4% 1.4%
Feb-11 Initial Jobless Claims 760k 793k 812k
Feb-16 Germany ZEW Survey Expectations 60.0 61.8
Feb-16 Germany ZEW Survey Current Situation -66.0 -66.4
Feb-17 PPI Final Demand YoY 0.8% 0.8%
Feb-18 Housing Starts 1658k 1669k
Feb-18 Initial Jobless Claims 760k 793k

Strengths

The Chinese Economy Charges Ahead in the Year of the Ox
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  • The best performing precious metal for the week was platinum, up 11.29%. Gold rose on Tuesday to a one-week high as the dollar and real U.S. Treasury yields fell. The metal was approaching its 200-day moving average. Inflation is a growing concern after Democrats released a first draft of key legislation to comprise President Biden’s COVID relief bill.
  • Platinum rallied above $1,200 an ounce to a six-year high on hopes that a recovery in industry and stricter car emission rules will tighten supply for the metal. Autocatalyst maker Johnson Matthey said Wednesday that it expects platinum’s share of catalyst demand to increase in 2021 after a 15-year decline.
  • Lunar New Year begins this week, which is traditionally an auspicious time to buy gold and sees strong demand out of China. Metals Focus predicts gold jewelry sales will be higher year-on-year this season given the low base in 2020 due to the pandemic. Sales continued to improve throughout 2020 after a weak first quarter. Retailer Luk Fook Holdings International Ltd. saw year-on-year same store sales growth of 11% at self-operated shops for its gold products in the further quarter, reports Bloomberg.  

Weaknesses

  • The worst performing precious metal for the week was gold, but still up slightly, climbing just 0.59%. This is its first positive weekly gain in the past three. A surge in the long end of the yield curve over the past month has been a headwind for gold. This has driven modest outflow from the physically backed gold ETFs over the past week.
  • Venezuela’s gold reserves fell to 86 tons in December, down 19 tons from a year earlier, reports Bloomberg. The country sold reserves last year to keep its economy running after crude production collapsed. The struggling nation could continue to sell its gold. 
  • In another blow to Ghana’s proposed gold-royalty fund, Databank Group, hired by the government to advise on its creation, has withdrawn its services over reputational concerns. Ghana, Africa’s largest gold producer, suspended the fund’s $500 million share sale in October after the state prosecutor began an investigation into the transaction, reports Bloomberg.

Opportunities

  • Bloomberg reports that Impala Platinum Holdings Ltd. said its profit, excluding some one-time items in the six months through December, jumped more than four-fold on higher output and a rally in platinum-group metal prices. Profit per share by that measure, known as headline earnings, rose 316% to 336% year-over-year.
  • According to a report by Bain & Co. and the Antwerp World Diamond Centre, China’s retail jewelry market will drive a recovery in the diamond industry this year. Miners reported an increase of 5% to 8% in the price of gems sold in January. China’s diamond jewelry market is expected to recover fully early this year, with long-term growth of 2% to 3% a year over the period from 2023 to 2030, the report said.
  • Newcrest Mining CEO Sandeep Biswas told Bloomberg TV that investors might want to pick up some gold if they’re holding bitcoin to counter its extreme volatility. “If you’re into cryptos, you want to consider having some gold.” Bullion “may act as a bit of a hedge against the volatility of cryptos,” he said.

Threats

  • Tesla announced it invested $1.5 billion worth on Bitcoin – adding further momentum to the adoption of cryptocurrencies. Cryptos such as Bitcoin could continue to take demand away from gold as a perceived haven asset that potentially moves in the opposite direction of the wider market.
  • Pretium Resources announced a COVID outbreak at its Brucejack mine in British Colombia. The pandemic remains a threat for miners as cases among workers threaten to close or reduce operations.
  •  • Valentine’s Day is this weekend – historically, an important holiday for the jewelry market, writes Kitco. However, the pandemic is expected to take a bite out of sales in the U.S. According to data from the National Retail Federation, 18% of consumers surveyed are expected to buy jewelry this year, which is down from 21% reported in 2020, prior to the economy being impacted by the coronavirus. But if you staying home for the cold weather and Covid-19 protocols this weekend, you can always jump online to Men? -24k Gold Jewelry and find an attractively designed piece of investment grade jewelry to give this year.

 

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.00%. The S&P 500 Stock Index rose 1.23%, while the Nasdaq Composite climbed 1.73%. The Russell 2000 small capitalization index gained 2.51% this week.
  • The Hang Seng Composite gained 3.02% this week and the KOSPI fell 0.64%.
  • The 10-year Treasury bond yield rose 4 basis points to 1.206%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was The Graph, rising 198.09%.
  • Tesla invested an aggregate $1.5 billion into Bitcoin this past week. According to an annual report, filed with the U.S. Securities and Exchange Commission, Tesla may acquire and hold digital assets from time to time or long-term. The company also mentioned that it plans on accepting cryptocurrencies as payment for its vehicles. This announcement sent Bitcoin surging through the week, reaching a new peak above $48,000.
  • With the massive net short positions taken by hedge funds on Bitcoin futures, the digital asset still managed to record a new high this week. As shown in the graph below, individual investors and asset managers have been the ones holding the net long positions on Bitcoin futures. It is worth noticing that the net short positions taken by hedge funds increased significantly as Bitcoin started its rally towards the $20,000 point in November 2020.

The Chinese Economy Charges Ahead in the Year of the Ox

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Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Alpha Finance Lab, down 16.86%.
  • Janet Yellen, U.S. Treasury Secretary, said that cryptocurrencies’ use for illicit purposes is a growing problem. She acknowledged the promise of these new technologies while highlighting the concerns of money laundering done by online drug traffickers using cryptocurrencies and its role in financing terrorism. These remarks came a week after the United Nations published a report stating that cryptocurrencies have been used to finance ISIS and Al-Qaeda.
  • Joker’s Stash’s founder, the pseudonymous JokerStash, is officially retiring after making a fortune of over $1 billion. One of the largest underground marketplaces for stolen payment card data, Joker’s Stash, saw $400 million sent to it since 2015. That number peaked at $139 million in 2018. The website makes its money through carding, the process of using stolen payment card data to purchase gift cards that can then be re-sold for cash. The recent rise in Bitcoin price substantially inflated JokerStash’s assets as the site has taken in around 60,000 bitcoins. The site becomes one of the few criminal marketplaces to shut down on its own terms.

Opportunities

  • BNY Mellon, the world’s largest custodian bank, announced that it will roll out a new digital custody unit later in the year to help clients deal in digital assets, including cryptocurrencies. The head of advanced solutions at BNY Mellon, Mike Demissie, said that the platform built by the company will be driven by client interest and demand, and that it will stay tuned to regulatory activity to make sure it supports assets that are allowed in a particular market. Also, the Ontario Securities Commission has approved the first publicly traded bitcoin exchange-traded fund (ETF) in North America
  • Mastercard announced that it is planning on giving merchants the option to receive payments in cryptocurrencies later this year. Although, Mastercard previously supported limited cryptocurrency transactions through its cryptocard partners Wirex and Uphold, it is now allowing transactions to be settled in cryptocurrencies as well. Meanwhile, Hester Peirce, U.S. Securities and Exchange Commissioner, said that the U.S. capital markets are ready for bitcoin exchange-traded products (ETPs) and that the SEC should provide for a natural way for investors to trade the ETPs.
  • Amazon is looking to strengthen its grip on the internet economy with the launch of a “digital currency” project in Mexico. The unnamed project is likely an effort to keep lucrative Prime customers eternally plugged into Amazon’s platform. A job post on Amazon stated that the new payment product will enable customers to convert their cash into digital currency which the customers can use to enjoy online services including shopping for goods and/or services like Prime Video.

Threats

  • Nigeria’s Securities and Exchange Commission (SEC) has put its plan regarding regulating cryptocurrencies on hold as the central bank of the country is prohibiting financial institutions from servicing crypto exchanges. Back in September 2020, the Nigerian SEC recognized digital assets and decided to create a regulatory sandbox for cryptocurrencies as part of its efforts to fully regulate the market. The central bank has argued that the move was taken to combat the use of cryptocurrencies by criminal element operating within its borders. Senator Sani Musa of the Niger East Senatorial District has claimed that Bitcoin has made the naira “almost useless.” 
  • A senior Finance Ministry Official in India told Bloomberg that India’s draft bill to put a complete ban on cryptocurrency transactions will likely be passed. The official also said that when the bill passes, cryptocurrency holders and companies will have a transition period of between three to six months to wrap up their activity in the digital currencies. The Cryptocurrency and Regulation of Official Digital Currency Bill is seeking to ban all “private cryptocurrencies” and only allow for a national digital currency to be used, which is something the country is working on.
  • Bank of America released a report on cryptocurrencies, warning about the risks and potential market disruption from anti-privacy government measures. The report states that encrypted private wallets with digital assets that can be transferred across borders would seem to undermine the monetary sovereignty of every nation-state. It also assesses the government taking the extreme route and banning all transactions in cryptocurrencies or the more plausible one, where it increases customer information and access requirements for cryptocurrency exchanges. The report also suggests that investors should approach cryptocurrencies cautiously as it expects the government to increase regulation and analysts are uncertain how the crypto markets would react to a reduced-privacy environment.

You can read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/the-chinese-economy-charges-ahead-in-the-year-of-the-ox/

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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