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So What Do I Do With My Money?™

  • Global consumer companies and high-end machinery makers are likely to be good long-term bets.
  • Energy, precious metals and agricultural commodities prices should be underpinned by the country's insatiable demand, and boost companies in those areas.
  • Most Chinese companies are likely to report poor earnings this year, but valuations look cheap.
  • China's demand for basic materials such as cement and steel should peak soon, hitting key suppliers and resource currencies in those markets.
  • China's buying of US Treasuries may slow over time, but a fire sale does not look to be in the cards.

Stocks and corporate bonds

  • Overall, China's domestic companies will likely see a profit hit this year as business only started deteriorating in the fourth quarter of last year.
  • That said, Chinese equities look very cheap by historical valuations. It is reasonable to expect gains of 25% or more this year after a horrible 2011.
  • Basic materials companies are likely to suffer as China hits the ceiling for cement and steel production.
  • Companies in oil and copper and agricultural products such as corn and potash used in fertilizers should benefit. Demand for these commodities is still far from peak levels. UK, Australian and Canadian equities should benefit because of the heavy weighting of mining companies in those markets.
  • High-end, specialized machinery makers should do well as China moves up the value chain.
  • Global medical device and agricultural equipment makers are likely beneficiaries from a population that is getting richer and living longer — but not necessarily healthier. 

Commodities

  • China has an outsized influence on commodities markets. The country has one fifth of the world's population and accounts for 11% of world GDP. Yet it accounts for about half the world's cement and iron ore consumption.
  • Expect the iron ore boom to fizzle out as China nears peak consumption in steel and cement. Demand for copper, which has many uses beyond construction, should hold up better.
  • Energy demand should hold steady. Oil demand typically runs at 0.6 times GDP growth. So even with the economy slowing down to 7% a year, oil demand increases by 4% a year.
  • Expect a shift to natural gas and nuclear energy. This bodes well for uranium prices in the long run.
  • Chinese manufacturers have brought down prices for wind and solar energy to levels where these energy sources can start to compete with oil, gas and coal.
  • A shift to a consumption model could imperil this model. Similarly, a credit contraction or financial bust would likely result in the drying up of Chinese project financing that has supported the market  

Government bonds and currencies

  • China is the single largest holder of publicly traded US Treasuries, excluding the US Federal Reserve. It has a $1.3 trillion share, or one-sixth of the total.
  • A shift to a consumption economy would mean less Chinese buying of US Treasuries – as opposed to absolute reductions. Assuming the US government is not closing the budget gap any time soon, conventional wisdom says fewer Chinese purchases would drive up yields and pummel bond prices. Fewer buyers equal lower prices.
  • As China opens to the world, more of its debt may become available for international trading. This may coincide with a bailout of its financial system and a jump in its debt-to-GDP ratio.
  • This appears a likely scenario – and does not bode well for China's ranking in the BlackRock Sovereign Risk Index. The country advanced three spots in the fourth quarter to rank 15th – ahead of the UK and France. Expect regression over the medium term.
  • Commodity currencies such as the Australian and Canadian dollars could take a hit as China reaches peak consumption in key industries such as steel.
  • Exporters and countries closely linked to the booming resources trade, such as Australia and Chile, could suffer.
  • More insulated economies such as Brazil could power along, driven by domestic consumption.