-- Today I am writing from the city of Guangzhou, formerly known as Canton, in Guangdong Province. Guangzhou is a major commercial and manufacturing region in South China and is the economic hub of the Pearl River delta. It is a port city with navigable access to the South China Sea and is just 75 miles up river from Hong Kong.The Beijing Olympics came to an end last night. I followed the games closely, as I do every four years. These Olympics seemed to be a little different though. Maybe it’s just that I happened to be in China during the games. Maybe it’s the fact that I have two adopted sons from China. There was certainly a great deal of hype in the build-up to these games, and a great deal of controversy as well.
So the last 17 days have been China’s coming-out-party. The world has seen a new and modern China that is also very proud of its ancient past.
I think everyone is aware that a lot of amazing things were invented in China, such as paper, the umbrella, and gunpowder, among many others. Here’s one I was not aware of: At the site of the Terracotta Army outside of Xi’an, a sword was unearthed that testing proved had chromium plating 10-15 microns thick. The West didn’t have chrome-plating technology to prevent corrosion until the mid-20th century. The Chinese beat us by 2,200 years!
There has been much speculation in recent months about how Beijing, and China as a whole, might benefit from the Olympic games. Beijing has unquestionably benefited from massive infrastructure improvements.
Besides a host of architecturally significant sports venues, there are two new subway lines, along with eight new rail lines — including a high-speed express line between Beijing and Tianjin. Trains on the Tianjin line can achieve a record-breaking top speed of 220 mph. Capital Airport has a new terminal, a new runway and an express rail line to downtown.
As for the rest of China, there seems to be a strong perception that Beijing’s makeover will serve as a model for other cities seeking to improve the general standard of living and attract investment. There are at least 49 cities with populations over 1 million and 5 cities with populations greater than 10 million. The potential for investment and growth is substantial.
Many have suggested that the Beijing Olympics were too extravagant, but if there ever was a country that could afford to be a little extravagant these days, it’s China. Unlike Athens in 2004 and Sydney in 2000, the majority of the money has been spent on infrastructure improvement rather than sports venues. Beijing and China will be reaping the benefits of these investments for decades to come.
These investments are also likely to attract additional foreign investment to China. The vitality of China and its vast potential has been on display for the entire world to see. As we have discussed in previous posts, the addition of foreign investment into the already hot Chinese economy forces the PBoC to unleash excess liquidity into the system to relieve upside pressure on the yuan. More liquidity results in currency debasement and more inflation.
All this investment creates jobs and wealth here in China. Double-digit growth along with expansionary monetary policy also puts upward pressure on wages. Each day, more and more Chinese are lifted out of poverty. It is estimated that by 2025 China’s middle- class will be the largest in the world, more than 600 million strong. At that point the Chinese middle-class will be nearly twice the size of the entire population of the United States (based on US Census Berea estimates).
That’s a pretty mind boggling. Just imagine the consumption and the demand for food and energy. Sure we’ve seen a pretty steep correction in these commodities of late, but does anyone really believe this retreat in prices is sustainable?
Consider also that the other members of the so-called BRIC nations have rapidly growing middle-classes as well. Between now and 2025 for example, India’s middle-class will grow ten-fold.
Given that there is a cultural affinity toward gold ownership in China and India in particular, I think its safe to assume that with more wealth will come more demand for the yellow metal from these countries. Factor in the price risks associated with a middle-class that will comprises over 50% of the global population in less than 20 years and gold just over $800 an ounce is a real bargain. Check that; gold is a steal at these levels.
