This report was brought to my attention from Yan Wang, Chief Strategist of the BCA China Investment Strategy.  He was kind enough to send me an email stating, “Nanci – interesting comments here that support our view that there is a serious shortage of infrastructure in China”. (…and no, he was not referring to his own quote!)

Reprinted from:  http://community.nasdaq.com
Author: Emerging Money

U.S. China Mining Group ( SGZH , quote ) reported solid profits of $7 million on $54 million in sales today. The Chinese coal mining company brought up concerns about China’s railway system, however, noting that some sales decisions were based on who could move the coal instead of who could pay the most for it.

According to CEO Hongwen Li, U.S. China Mining in 2011 ”produced more, brokered less, and had fewer customers. The tightened capacity for coal transportation by rail was one of the main reasons for our increased efforts in selling more coal extracted from our mines to certain customers who were able to book railway cargoes for delivery during 2011.”

China has been pursuing an ambitious railway development program, and BCA Research says the nation’s total track length has increased 50% since 1995. Railway usage is up even more, though, with passenger traffic doubling and freight increasing by 150%.

Until recently, railway building has been keeping up with the growing demand. Approvals for new railway projects were reduced in 2011, however, then halted completely as concerns rose about railway safety and China’s overheating economy.

According to JP Morgan, China is now pushing forward with railway developments again, encouraging developers with cash and tax benefits. However, it may take some time to get the engine moving.

Investors should be on the lookout for companies like SGZH whose growth is being limited by lack of railway capacity. They may also want to keep an eye on Chinese railroad developers like the China Railway Construction Corp., which has been gaining on the Chinese exchanges after reporting profits March 30. China Railway does not trade in the U.S., but is a small part of the Guggenheim China Small Cap Index ETF ( HAO , quote ) and other exchange traded funds.

Reprinted from The Edge Singapore

The fallout from slowing Chinese growth is the main reason why emerging-market equities have not been able to rally with the Standard & Poor’s 500, which is up 11.6% this year, after gaining 8.4% last year, reasons BCA Research. To be sure, BCA points out that although emerging-market equity prices are at the same level they were two years ago, the S&P 500 is up some 20% over the same period. Markets sometimes decouple and this could be that occasion, reckons BCA.

BCA’s Emerging Markets Strategy believes the emerging-market and China growth is skewed towards the downside — BCA recommends investors hold short emerging-market equity positions and long US equity positions. This view coincides with hedge fund manager Barton Biggs’ bullish stance, who is raising his net-long position to almost 90% for US equities, up from 75% in February and 65% in January, betting on “money migrating back to stocks”.

Property Market Impact

China’s domestic demand hinges to a large extent on its property market.

Policy restraint coupled with a drop in affordability is leading to unsold inventory, although BCA estimates that there is 40% more space for sale this year than a year ago. The slump in housing demand is just the first phase of a property market downturn, cautions BCA. The second phase will be a drop in construction activity. As developers scale back construction because of tighter credit, construction activity is likely to drop off sooner rather than later, says BCA. That in turn will lead to a fall in China’s demand for raw materials, industrial metals and capital goods.

Since China’s property market and construction dynamics are driven by domestic policy and fundamentals and not by US economic fundamentals, by the same token, it is less likely to affect US economic performance.

Bottom line: Emerging markets that produce industrial commodities will likely see their equities and currencies under pressure.