JIM ROGERS: “The Most Important Economic Development of the Next 20 Years”

Posted by Jim Rogers via Outsider Club

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While we’ve packed up the party hats, guzzled the last of the champagne, and already started ignoring our New Year’s resolutions here in the U.S., China’s New Year is about to begin — and it’s poised to be a huge one for investors.

It will be the year China turns its economy around and delivers investors the double-digit gains they were so used to when China started adopting free-market principals 30 years ago.

Welcome to the year of the horse…

In China, the spirit of the horse is not only a symbol of travel and improvement, but also of a sign of speedy success. It also represents the Chinese people’s ethos to improve themselves at all costs.

And they have already gotten an early jump in the improving-themselves department…

UnknownFamed investor Jim Rogers is calling it “the most important economic event of the next 10 to 20 years.”

Here’s what happened in Beijing while we were watching the ball drop in Time’s Square…

In November, Chinese leaders gathered for a historic meeting called the “Third Plenum” to unveil a set of sweeping economic reforms in order to jump-start their lagging economy. Many skeptics — myself included — figured these would be ceremonial “reforms” that would make for a good press conference but wouldn’t really have any teeth.

Instead, President Xi Jinping rolled out a rather drastic series of changes that focus on China’s bloated, incompetent state-owned enterprises, demographic nightmares, and draconian social policy.

What does it mean for investors?

Let’s have a look-see…

Kill the Monopolies

First thing on the docket is to shake up the bloated state-owned businesses that muck up the works, cultivate cronyism, and are generally just bad at business…

Historically, China’s state businesses have taxed the nation’s resources and boxed out private sector business — much to the detriment of the average investor. So as part of the 2014 reforms, China is actually allowing private sector cooperation to inject some free-market savvy into the state monopolies.

That is a big, big deal…

From the Financial Times

The government will allow state companies to introduce employee stock ownership plans, a way of encouraging managers to target profits. Bringing more private investors on board will also increase the portion of state companies in the hands of performance-minded shareholders, a disciplining force.

Even more important are the reforms that will change their operating environment. Shifts to market-based pricing for energy inputs and interest rates are, over time, undermining the advantages that state companies have over their private rivals.

In order to further embrace free-market ideals, the Chinese also announced they would loosen the harsh price controls that have dampened private investment in their energy and agriculture industries.

Welcome changes, to say the least…

The endgame here is to transition China’s economy from one of investment and exports to one that is a free-market and consumer-driven. But purely economic reforms won’t be enough to transition China into the consumer-driven behemoth they wish to be.

They’re also going to need some serious social reforms…

Generational Suicide

When the average Joe discusses Chinese social policy, the thing that always gets mentioned first is the one child policy…

Since 1979, China has restricted the reproduction of its citizens to one child. There are exceptions to this policy, but all told, the program is estimated to have stymied somewhere around 200 million births. It has also been blamed for horrors such as forced abortions and female infanticide.

But according to Xi Jinping, the one child policy may be going the way of the dodo.

A demographic time bomb has been ticking for the Chinese for a while now. If they kept up current policy, the population of 65-plus would double by the 2030s. By 2050, there would be less than 1.5 workers for every retired person in China, according to the Brookings Institution.

Here are a couple more jaw-dropping facts about China’s desperate need to pop out some more babies. From Stratfor Global Intelligence:

  • China’s working age population peaked last year, shrinking by 3.45 million(or -0.6% year-on-year), according to the National Bureau of Statistics, to 937.27 million. That represents a major demographic turning point, not just for China, but also for Asia and the world. The turning point has come three years ahead of schedule, as most demographers had put China’s peak at 2015.

  • More than 13,600 primary schools closed nationwide in 2012. The ministry looked to China’s dramatically shifting demographic profile to explain the widespread closures, noting that between 2011 and 2012 the number of students in primary and secondary schools fell from nearly 150 million to 145 million. It also confirmed that between 2002 and 2012, the number of students enrolled in primary schools dropped by nearly 20 percent. The ministry’s report comes one day after an article in People’s Daily, the government newspaper, warned of China’s impending social security crisis as the number of elderly is expected to rise from 194 million in 2012 to 300 million by 2025.

  • Women are bearing only 0.71 girls over their lifetime, well below the replacement figure of just over unity. In 2010, there were 51m more men than woman in the country. The sex ratio among newborns is 120 boys for every 100 girls, the highest in the world (Figure 39). At this rate, there will not be enough brides for as many as one-fifth of today’s baby boys when they get to marrying age, heightening the risk of social tensions.

Have fun building a new consumer economy on that brittle foundation…

If you really want to build a consumer economy, the one major piece is rather simple: you need people to buy things!

To combat this demographic imbalance, the Chinese have started to relax the one child policy, now allowing parents to have two children if either parent was an only child themselves. But they will need to relax this even further to avoid cataclysmic population meltdown.

Also importantly, these new people will need places to live — preferably in concentrated urban economic areas. That’s why the Chinese are accelerating Hukou (residents) reform. This will make it much easier to move from rural China to the bustling economic hubs like Hong Kong and Shanghai to drive up consumption.

Those are the changes that have Jim Rogers excited. He’s banking big on the new Chinese consumer economy…

How to Play It

As long as they rely on a shadow banking system that has somewhere in the vein of$6 trillion in off-balance-sheet loans every year,  I’m going to remain skeptical on the economy as a whole.Now, I take anything China says with a splash of soy sauce…

And the problems they are facing — like most New Year’s resolutions — will have some unpleasant side effects at the beginning…

But Chinese stocks are trading at near-record lows. For example, the iShares China Large-Cap ETF (NYSE: FXI) — is down 43% from its high in 2007. In a worldwide search for depressed stock prices, China will be a big destination for investors. A ton of cash will be flowing into China this year, no doubt about it.

That’s where Jim Rogers comes in. He’s a genius, pure and simple. The Quantum Fund he started with George Soros returned an unbelievable 4,200% over ten years between the ’70s and ’80s. And he thinks those wild returns are completely possible again… in China.

That’s how strong his belief in China really is.

And he is more bullish than ever right now. He thinks the new Chinese reformers “have the wind at their back.”

He paraphrased an ancient Chinese parable to emphasize the point: “The way you cross the stream is to feel one step at a time, one rock at a time. Eventually, you get to the other side, and start moving ahead. They are on the other side right now.”

I’ve pored over his financial disclosures and found a very attractive Chinese company that he has recently sunk a lot of money into. And better yet, it’s poised to breakoutwhether or not China’s reform take hold.

You can get immediate access to it in the Crow’s Nest portfolio by subscribing risk-free, right now.

The year of the horse is just beginning. Don’t wait until the race is over…

Godspeed,

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Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow’s Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he’s brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor’s page.

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