Today there was a report that scotch whiskey sales are down 39% in the past year. I know–that’s so depressing that I need a drink. I did a spot on CNBC Closing Bell today on the link between scotch whiskey and China growth.
You can see a short video of the spot by clicking here. Here are the briefing points I sent for the show to give you more background on the topic than we covered in the spot.
1. The BIG question–SCOTCH
This one has nothing at all to do with China growth. It is about local government corruption. Most Americans don’t realize that, in China, most important government economic decisions are made at the local/city level, not in Beijing. The real power is in the hands of Vice Governors and Vice Mayors (the Vice part here is very appropriate) because they make all of the land deals for their local area. e.g., if a US or German company wants to locate there the Vice Mayor is the one who makes the deals for free land, free utilities, no taxes for X years, etc. Not shockingly, this is also where the real corruption is in Chinese politics. This is why the 2nd largest investor in China is (accounts the local politicians have in) the Cayman Islands. (A Vice Mayor in Hangzhou–Alibaba’s city–once offered to give me an office tower if I would snare enough US financial firms to occupy the other towers they were building).
So what does this have to do with Scotch? Last year the new team in Beijing launched a major crackdown on corruption. They did it because local citizens are angry about the local corruption, which is a risk for political stability–the only thing that Beijing leaders acre about. They have focused on property deals but also on big entertainment budgets, which is why restaurant sales in China have been so bad. And of course, booze–along with cigarettes the international currency. This also takes the legs out from under Macao gambling dens, not all bad.
2. The other question. China growth.
Last weekend’s numbers showed weak industrial production. Yesterday’s PMI report showed improving conditions for manufacturers, especially exporters. Go figure.
What’s really going on?
-China is growing more slowly that it was.
-Best guess is a little over 7% this year and next.
-That’s 3x US growth and infinity times EU growth. Don’t feel bad for them.
-The growth is different that before.
-manufacturing is getting tougher both due to competition (Vietnam…) and the fact that their biggest customer–the EU–is flat on its ass and showing no signs it will improve. the biggest employment (=stability) issues are in the south where there are lots of migrant workers.
-big infrastructure spending from the stimulus is finished. That means some of the 150 million migrant workers that have been up on scaffolds will be climbing down to walk around the streets now looking for work now.
-The big re-engineeering is moving forward, shifting activity from mining and manufacturing to service jobs. That will take a long time to do. (remember, we did it too.)
-Real estate is always hard to forecast. Soft at the moment with saggy prices. Remember though that most homes are owned by the people living in them, not investors. Most buyers are first-time buyers. Most purchases are done with lots of cash–not much mortgage debt. And there is no mortgage-backed securities business in China. So if things godown, it is mostly the developers that are at risk.
-For investors this means stay away from mining stocks (FCX, BHP, RIO) and heavy construction stocks (CAT) for a while. But the growing China middle class story is still intact.
JR
