Morningstar Advisor - December/January 2012 - (Page 35)

Chinese economy is roughly 170% larger than it was a decade ago. But the economy now consumes 383% more aluminum and 393% more steel. Total expressway mileage is up 354% over the past decade, the number of tunnels is up 338%, and floor space under construction, a concrete measure of real estate activity, is up 337%. China bulls, nonetheless, argue that this rapid build-out of Chinese real estate and infrastructure makes sense because it correctly anticipates a rapid increase in consumption. Even if a good deal of the new floor space goes unoccupied at the moment, continued urbanization and rising incomes will eventually fill that vacuum. And although some of the new expressways, bridges, and tunnels may see only a trickle of traffic today, rising automobile ownership rates will ultimately generate a steady stream of vehicular flow. From this perspective, today’s investment is nothing more than down payment on tomorrow’s consumption. But given the immense investments made in the past decade, consumption has a lot of catching up to do. And even if the massive capital additions have correctly anticipated the consumption growth we’ll see in the decades to come, the economic rationale for further outsized capital outlays grows increasingly weak with each passing year. After all, any nation, even a rapidly growing one, needs only so many airports, highways, high-speed rail lines, and luxury apartments. Indeed, by some measures, China’s physical capital base already looks like that of a major developed economy. Consider, for example, the installed capacity of China’s steel industry. Now roughly five times the size of what it was a decade ago, capacity is nearly twice that of the United States, Japan, and the EU-27 countries combined. Notably, the latter collection of economies has nearly 1 billion people of its own and collective GDP of about $36.6 trillion, making it more than six times the size of China’s economy. Exhibit 1 Two Kinds of Growth: In the 1990s, China’s sources of growth increased at similar rates. From 2001 on, China’s growth story changed. Investment growth surged, while consumption failed to keep up. Cumulative Real Growth, 19912010 (1991100) Index Value GDP Consumption Government Investment 1000 900 800 700 600 500 400 300 200 100 91 93 Balanced Growth Unbalanced Growth 95 97 99 01 03 05 07 09 Source: IMF, NBS, Morningstar Exhibit 2 In Its Own League: China’s fixed-asset-investment boom has far surpassed the booms of the three biggest success stories of the past 50 years. Gross Capital Formation % Share of GDP 50% 45 40 35 30 25 20 1 Year 1 Source: IMF, NBS, Morningstar Japan (1962–81) Korea (1984–2003) Taiwan (1969–88) China (1998–2010) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 MorningstarAdvisor.com 35 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

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