Whatever You Think About China, You Can't Deny Its Expanding Influence
Editor's note: You could be missing out on profits if you only invest in U.S. stocks.
But it's more than that...
Most Americans just don't want to hear about the incredible opportunity in Chinese stocks at all. Our colleague Steve Sjuggerud and his research team refer to it as "China-phobia."
In today's Masters Series – which comes from the July 26 and October 7 editions of Steve's free DailyWealth e-letter – True Wealth Opportunities: China analyst Vic Lederman details how two U.S. politicians' China-phobia could harm millions of everyday investors... and how he recently came face to face with a symbol of the country's expanding influence...
Whatever You Think About China, You Can't Deny Its Expanding Influence
Communist sympathizer. Propagandist. America hater.
I've been called all of these things, simply for writing about the opportunity in China.
Heck, I once quoted a few tweets and was called a mouthpiece of the Trump administration... which just goes to show you can't please everyone.
Name-calling just comes with the job. And to be honest, I understand it.
Regardless of your intentions, people will read what they want into your writing. That's why, as a rule, I avoid politics. Instead, I strive to provide the best data I can... and the most honest interpretation.
Still, occasionally a stupid idea bubbles up that's directly related to both finance and politics. And it has to be addressed.
Folks, today is one of those days... Two of our nation's senators want to tamper with government 401(k) and Thrift Savings Plans ("TSPs").
The reason? China-phobia. Pure and simple.
Let's dig in...
On September 30, CNBC published an open letter from Senators Marco Rubio (R-FL), and Jeanne Shaheen (D-NH). So you know what's coming next is at least bipartisan stupidity.
The basic premises of the letter are pretty straightforward. Here's how I understood them...
- China is bad.
- Investment indexes (namely, global index provider MSCI) now include China as an emerging market.
- Most 401(k) and TSP plans use MSCI's indexes as their benchmarks.
- That means that the government is directly funding China's Communist Party.
The first point is just politics. And like I said, I try to avoid that. So whatever you think of China, we'll set the first premise aside for now.
Next, it is true that China has been added to the world's financial indexes. This one is a big deal...
It means that trillions of dollars are flowing into China's markets. And as my friend and colleague Steve Sjuggerud has explained many times, it's righting one of global finance's most obvious wrongs. Thanks to this change, the world's second-largest stock market is finally part of the world's benchmark indexes.
All this means that passive investing dollars are moving into China. That includes 401(k) plans that have exposure to emerging markets. So the letter gets this part right.
The last point, though, is where the logic falls apart. And I have a message I need to share with the senators...
Buying a share of a company is not the same as handing cash to that company.
Every investor knows this, right? "Buying shares" is literally what it says on the tin... It's buying a share of the business.
After the initial public offering, the slices of ownership are traded around on the open market. And just to make it very clear, when you buy a share of the company, the company doesn't get a cut of the deal...
It's a transaction between two private parties – the buyers and sellers on the open market. (Like always, the bank gets a cut in the middle... But that's a story for another day.)
If you understand this, well, congratulations. You're smarter than a U.S. senator.
Now, there's a lot more that's wrong about this letter. (If you're curious, you can read it in full right here.) But this broken premise makes the rest of it mostly irrelevant.
MSCI's inclusion of China in its indexes – indexes that are supposed to be the benchmark for world stock markets – does not mean U.S. citizens are "funding China's Communist Party." That's not how the stock market works.
So, will the U.S. government force its employees out of their passive China investments? It's possible. Thankfully for the broader market, it would be a largely symbolic move. Money would keep changing hands across the world, just as it always has.
But unfortunately for government employees, they'd be locked out of one of the world's fastest-growing markets. And over the long term, that could mean serious underperformance in their retirement accounts.
Keep that in mind if this protectionist investing sentiment finds its way to your front door.
Its main premise is broken. And at the end of the day, it'll hurt mom-and-pop investors... all so a few politicians can score a symbolic win.
And besides, we already have symbols of China's expanding influence all around us. Earlier this year, I was in the middle of America's heartland. And I was looking directly at one...
I was passing through Chicago O'Hare International Airport. It was early in the morning. Most of the shops were closed. But the duty-free was open. (It always is.)
If you've been through O'Hare, you know passengers are funneled through the duty-free shops on their way to the gates in Terminal 5. It guarantees you get the opportunity to buy something tax-free.
Well, I wasn't in much of a buying mood. But something did catch my eye...
You might not recognize it, but below is an advertisement for Kweichow Moutai. Take a look...
It's the drink of choice for China's wealthy, powerful, and elite. And this reputation has made Kweichow Moutai the most valuable liquor company in the world.
This alcohol you probably haven't heard of represents the largest stock in mainland China. That's right... Kweichow Moutai is at the top of the MSCI China A Index. But there's more...
As I alluded to earlier, every company on that index is in front of an ocean of cash that's flowing into China, thanks to global index provider MSCI's inclusion of local Chinese shares. It's a story of massive growth.
So Kweichow Moutai isn't just an obscure drink. It's a symbol of China's growth into the world around it.
Now, you might be wondering, "What makes it so special?" Well, I need to start with a disclosure. I haven't tasted the stuff. But oddly enough, Steve has...
As some Digest readers might know, Steve doesn't drink much. And to him, it tasted like fire. The flavor, people say, is one that would be considered "acquired."
It's no wonder Kweichow Moutai was hot going down for Steve... It's a grain alcohol, measuring in at 106-proof. It's said to have notes of pear, walnut, almond, and – of all things – soy sauce. The company itself claims Kweichow Moutai has 155 distinct aromas.
So it's probably not America's next hit party drink. But seeing it for sale in Illinois, with signage in Chinese, isn't something the average American would expect.
As I said, it's another sign of China's expanding influence...
Think about it. Have you traveled outside of the U.S.? You'll usually see plenty of signs in English... and vendors selling stuff U.S. tourists love to take home.
We're used to living in a world that caters to the U.S. And the world still does that. But it's not just about the U.S. anymore.
There were more signs with Chinese on them at O'Hare than just the ads for Kweichow Moutai... Many of the advertisements included Chinese translations of their English slogans.
Much of this is driven simply by China's scale. It has a population of 1.4 billion. And thanks to huge economic growth, these folks are getting wealthier at a staggering pace. Take a look...
The chart shows how China's gross domestic product (GDP) has grown over the last couple of decades. It's a measure of a nation's economic output. But we can use it as a proxy for the rising wealth of that nation's citizens.
There's no question China's citizens are getting wealthier. And the pace of this growth is unlike anything the world has seen before.
It has been 30 years since China opened its doors to private business. Now, the country is home to nearly one in five of the world's billionaires. But it's not just the super wealthy who have benefited. The rise of China's plain old rich – and the middle class – has been astronomical as well.
You'll notice that the U.S. looks like it's standing still by comparison. A lot of that is because China had a lot of catching up to do. But the fact remains, Chinese citizens have more money today than they ever have before... And people with money travel.
So it's no wonder we're starting to see advertisements follow their audience. If wealthy Chinese are visiting Chicago, you'd better bet vendors there want to sell them Kweichow Moutai.
It's the drink that symbolizes power and influence, after all. And in this case, it illustrates that China's influence is expanding to the rest of the world... whether we like it or not.
Good investing,
Vic Lederman
Editor's note: The world is starting to notice China's expanding influence... And on November 27, another $22.7 billion is guaranteed to flow into a small group of Chinese stocks. If you act now, you could potentially double or triple your investment in the years ahead. That's why Steve rushed to put together a special presentation with all the details. Watch it right here.