"China will burn brighter than ever in 2013 and 2014!"
In the last few years the China-bears have had a field day with the fact that China's economy decelerated from a growth rate of 11.9% in 2010, down to 7.9% by the end of 2012.
'China's going to crash... Australia is going down with it... Sell all your mining shares'.
It's been all over the media. I'm sure you've heard it too.
But is it accurate?
Scary doomsayer predictions make fun reading, but do the facts back this conclusion up? No, I don't think they do. I'll show you why in the following pages.
The obvious fact to point to is that the China bears have had nothing to growl about lately. The latest growth rate of 7.9% was a big jump on the previous 7.4%, and is actually above target. And let's not forget that 7.9% is still stellar growth by any standards.
You need to also remember that 7.9% growth today adds far more to China's economy — and therefore requires more commodities — than 11.9% growth did when China was much smaller.
But let's look a little deeper...
Time for some clear-eyed perspective on the financial health of the Middle Kingdom
Today I'm putting a stake in the ground and claiming that the next leg of the China-driven Aussie resources boom is about to begin.
The specific reason for the timing of my call is that China's once-in-a-decade leadership change has recently taken place.
and as I'll show you shortly, in the past this has consistently triggered a multi-year surge of infrastructure spending.
This spending will be on top of the current twelve trillion Yuan (US$2 trillion) spending target for China's current five-year plan.
This will require vast amounts of commodities. Australian commodities.
and the good news for you is that this comes right at a time when junior stocks in the industrial commodities of copper, iron ore and coal are dirt cheap.
To me this spells out the perfect recipe for what should be some big trade opportunities of 2013 in Copper, Iron Ore etc.
First...some perspective on China...
Since the crisis started unfolding in 2008, the Chinese economy has DOUBLED.
any ill effects of the global financial crisis have been extremely hard to spot in China's growth trajectory.
and taking a step further out, over the last ten years China's economy has grown from $1.5 trillion (roughly the size of Australia's economy today) to $7.3 trillion (half the size of the US economy).
That's a FIVE-FOLD increase in size.
China's economy (in $billions) has increased FIVE-FOLD in ten years - Source: Trading Economics
I don't know about you, but this chart makes the last two years of anxiety over China's economy seem a bit misplaced.
China: Adding a New South Wales and Queensland to its economy Every Year!
Look, it's all about scale. You need to look at how much the economy has grown in absolute terms.
Why? 10% growth in China is more today than it was five years ago. Even though the growth is a bit slower. Because the Chinese economy is BIGGER than it was five years ago.
For example, when the Chinese economy was growing at the supersonic rate of 13% in the heady days of 2007, it was just $2.71 trillion in size. So this growth added an extra $350 billion to the economy. That was equivalent to adding an economy the size of Victoria's in a year.
But even though the growth rate in 2012 was slower than 2007...MORE was added to the Chinese economy than in 2007.
So if the Chinese government's target of 7.5% ever sounded modest to you, bear in mind it is MASSIVE when your economy is as big as China's.
and that growth requires an equivalent amount of the raw materials of an economy - commodities.
To be precise, 2012 growth added $570 billion to the economy.
Or put in more local terms, this was like adding an economy the size of New South Wales' AND Queensland's combined in the space of just twelve months.
Just imagine it!
So if the Chinese government's target of 7.5% ever sounded modest to you, bear in mind it is MASSIVE when your economy is as big as China's.
But if 7.5% still sounds uninspiring, I'd like to give you some perspective of what it does over time.
Over ten years, 7.5% growth DOUBLES the size of an economy,
Over fifteen years, 7.5% growth TRIPLES the size of an economy, and
Over twenty years, 7.5% growth QUADRUPLES the size of an economy.
So assume China achieves 7.5% growth per annum over the next ten years. The Chinese economy would double in size to $14.6 trillion, making it as big as the US economy is today.
This is important to think about — because that absolute growth requires an equivalent amount of the raw materials of an economy — commodities.
So here's my big point for the China bears I share an office with: we don't need the double digit economic growth rates of yesteryear to be bullish on Chinese commodity demand.
7.5% growth will be more than enough.
and where Chinese demand goes, so do the valuations of resource stocks. So this spells a huge opportunity for you in buying oversold, good-quality resource stocks.
The unstoppable power of the 5-year-plan
A famous study by Yale University showed that jut 3% of its students left university with a written plan for their careers. At their twenty year reunion, those students that had a plan were earning 3-4 times as much as the others.
It's Like a road map For Aussie Investors...
"If you want to know where China is going, just read the five-year plan because it tells you. There's no surprise. They don't miss targets that they set in their five-year plan.
I spend a lot of my time saying to Australian companies, "What are you doing to attract this kind of investment because it's coming... it's a big wave and it's going to be a 30 year wave"
and I say to you as investor: how can you profit and benefit from this wave of money that's going to end up in these kind of companies?"
David Thomas, Australia China Business Council
Writing your plans down helps you achieve them.
Chairman Mao Zedong knew it too.
Back in the early 1950's Mao was the first to announce a 'five-year plan' for China. This was revolutionary. Today, China is in its twelfth of these five-year plans.
This started in 2011, so 2013 will be its third year.
The 13th plan will then start in early 2016.
Amongst many other things, the current plan set targets for urbanisation of 51.5% (up from 47%), increased population growth inland away from the economic centres, and aims for a population of 1.39 billion by the end of 2015.
The plan also targeted China becoming more of a consumer society, to make the economy less dependent on exports and government spending.
A key fiscal part of the five-year plan involved laying down a target for infrastructure spending including:
* Transport infrastructure (roads and airports) * Railway infrastructure * Power utilities * Water utilities
Across these four areas, China plans to spend a total of 12 trillion Yuan during the current five year plan.
That spending (and the knock-on spending it creates in the economy) comprises a large part of the annual economic growth figure. Given the scale of this spending, there is not much chance that Chinese economic growth will dip much in this time.
and so far, China is not quite halfway through its infrastructure spend for the current five-year plan.
This chart shows you where we are up to in each of the infrastructure spends so far. In total, another 7 trillion Yuan of spending is lined up.
China needs to spend another 7 trillion Yuan in three years to hit target - Source: Macquarie data,
That's not to say these targets are the limit of spending. In fact, during the 11th five-year plan, Chinese infrastructure spending overshot by about 40%.
If this is any guideline, then China may even overshoot on the spending again during the 12 year plan. This would increase China's growth rate further still...
New leadership triggers more spending
Last November, China had a once-in-a-decade change of leadership.
This is the most important reason behind my timing of this Special Issue.
Infrastructure spending has jumped significantly straight after the last three leadership transitions.
There's little reason not to expect it to happen again this time round.
Chinese investment growth picks up after a leadership transition - Source: Financial Times,
There are two main reasons for this jump.
Firstly investment decisions are often deferred until the change of power is executed, so there is more political certainty. Secondly the new members of the committee like to make their mark early on in their tenure.
So although there is a vast sum of infrastructure spending planned already, we will probably see a jump in the next few years because of China's new leadership.
Now I'm going to tell you what all that means for you.
It's the single-best way for you to profit from a looming resurgence in Chinese infrastructure spending from the comfort of your armchair, right here in Australia...
There are a few other ways to play the next phase of China's growth.
The ingredients of steel are the most obvious.
So junior Iron Ore stocks etc. could do well as could those of the less obvious steel ingredients such as manganese, vanadium, and tungsten.
Dr. Alex Cowie of Diggers and Drillers
GBG Price at posting:
26.0¢ Sentiment: Hold Disclosure: Held
