China's new era may be no golden age for stock investors
with Tom Holland
China is about to move from its Gilded Age into a new Progressive Era, says a report published yesterday by Credit Suisse analysts Vincent Chan and Peggy Chan.
The allusion is to the transformation that took place in America's society and economy around the end of the 19th and the beginning of the 20th century.
From the end of the Civil War to the late 1890s, the US economy went through a phase of rapid growth powered by high investment and expanding industrialisation; a period that was also characterised by minimal regulation, endemic corruption and soaring inequality.
This was the so-called Gilded Age in which 'robber barons' like oil tycoon John Rockefeller, steel magnate Andrew Carnegie and railroad king Cornelius Vanderbilt built huge business empires and accumulated vast fortunes. It was also the age in which giant American corporations like General Electric and AT&T, which went on to form the backbone of the US economy in the 20th century, first began to emerge.
For the past 20 years, China has been through something similar, argue the two Chans. Now rapid economic growth has left China facing similar problems to the US at the end of the 19th century: massive income inequality, widespread corruption, deepening concerns over food and product safety, the growing power of business monopolies and increasing calls for the government to provide better public services.
In the US, rising popular dissatisfaction propelled important social and economic changes under the 'square deal' and 'new freedom' policy agendas of presidents Theodore Roosevelt and Woodrow Wilson. During this Progressive Era, the tax system was overhauled and a federal income tax introduced. Antitrust laws were passed and monopolies broken up. And the government stepped up its regulatory role, establishing the Food and Drug Administration and the Federal Reserve. The result was a more balanced economy and a more equitable society, in which the share of labour compensation rose from just over 50 per cent of gross domestic product at the start of the 20th century to almost 67 per cent 30 years later.
Now, Beijing's 12th five-year plan, with its emphasis on economic rebalancing, higher private consumption, and better housing and health care, may be about to usher in a similar progressive phase in China, suggest Chan and Chan.
As a result, over the next five years, they expect mainland growth to slow to an average 9 per cent a year from an estimated 11 per cent in 2010. At the same time, household incomes will increase at a faster 18 per cent rate, and labour compensation will rise from just over 50 per cent of GDP to 62 per cent in 2015, driving a steep increase in private consumption. In short, they expect exactly the sort of economic rebalancing that everyone has been calling for over the past few years.
That should be good news for investors, and over the next five years, the two Chans forecast an average doubling in sales and market capitalisation for leading Chinese companies such as Air China, property developer China Vanke, and insurance company Ping An (see the charts below).
But investors should be warned; China's Progressive era, if it materialises, is unlikely all to be plain sailing. America's own Progressive Era was marked by successive financial panics. In the stock market slump of 1901, triggered by a collapse in railway shares and generally reckoned to be Wall Street's first crash, the Dow Jones Industrial Average shed 46 per cent of its value.
Then the bankers' panic of 1907, triggered by contagion following the collapse of an over-extended trust company, saw the Dow fall by a gut-wrenching 48.5 per cent.
So while China's Progressive Era - just like America's - may bring great advances, there is little reason to believe it will be any kinder to investors.
In addition to stock market crashes, America's Progressive Era was also marked by an early bout of skyscraper building. Indeed, several economists have argued that the loose credit conditions needed for tower block construction also tend to inflate stock market bubbles, and that as a result, the large scale building of skyscrapers is a reliable indicator of looming market collapse.
If so, investors in Chinese stocks should be wary. According to Andrew Lawrence of Barclays Capital, 22 of the 50 skyscrapers due to be completed around the world over the next six years - and the majority of those scheduled for completion between 2013 and 2015 - are in China.