China showing true meaning of capitalism

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Chinese capitalism

Photo Credit: Cartoon Stock

The Chinese economy is still doing very well, regardless of what their financial markets are saying. While the Chinese stock markets are well off their highs, this dynamic is likely the result of a busted bubble rather than a fundamental breakdown. It’s obvious that speculators were simply paying too much for Chinese equities in the first place.

Trade surplus giving a helping hand

The real strength behind the Chinese economy, their huge trade surplus, is showing through in other parts of the economy. What was once considered an authoritarian government is freeing up the markets and building an economic powerhouse with the excess billions of dollars that enter the country every year. Free enterprise is taking its profits and reinvesting both in capital goods and in other markets.

Chinese getting more for their money

Just a few weeks ago, the Bank of China decided to spread itself around in the form of a 30% stake in a private Swiss bank. Though the investment was relatively small, just about $8.7 Million, it shows that the money that flows into China is being invested in literally a million different ways. Though the yuan may be appreciating and hurting Chinese exports, it’s buying a lot more overseas and giving Chinese investors a way to diversify their newly found prosperity to reap the gains overseas.

China is making some serious investments

There have been many key acquisitions coming out of China thus far this year. Air China recently said it is seeking a stake in Australian Airlines. The Chinese government has put $5 Billion into US brokerage Morgan Stanley and $3 Billion into a 1.6% stake in French oil company Total SA. China, through semi-private corporations and its own sovereign wealth fund, is seeking to invest overseas while buying up critical assets, such as oil and mining companies.

Investment eliminates inflation

The active investing is good for a variety of reasons. First of all, China has been swimming in inflated currency even as the value of the Yuan rises. Too much money flowing into China is pushing up prices, even though its own currency is practically deflating itself. Buying assets overseas works as a deflationary effect and ships out cash for a stake in hard assets.

Active investing also helps stabilize future income, even if the Yuan continues to rise. If the Chinese currency rises too quickly, they’ll lose the competitive advantage in their exporting. By making investments around the world, the Chinese government and the people of China are better invested worldwide to maintain an income.

There is still reason to invest in China, especially in corporations that tailor the developing middle and upper classes. Toyota is doing well in China by selling its popular Camry and Accord brands as a luxury vehicle. Cell phone companies and tech stocks are hot in the Asian market; more people have access to the money to buy non-staple goods than ever before. Though the Chinese markets are still off by a huge margin from their late 2007 highs, there’s plenty of good investments still to be made and at a discounted price.

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