Investors Are in Denial About China
bloombergview.com
bloombergview.com
When people think about China they tent to assume that China is somewhat similar to a western country going thru the afterwards of some sort of overheated boom. Say the US from 2002 to 2007 and the big recession of 2008-2010.
But China is not mature and developed like the west.
Sure the east coast has nice modern cities which look like the cities of any Western country. But large parts of the country are still poor, rural and remote. When construction goes on here, a modern road is built where there was nothing before cutting the transport time between two cities from 5-10 hours to 1 hour. Houses are built for people to work in the city doing high-productive factory jobs where they before were doing small-time farming in the country side.
This is a massive lift in real economic activity which can finance a lot of debt.
Completely incomparable to the expansion of credit to low-income families to finance housing that gave the boom in the US and other western countries from 2002 to 2007.
Secondly there is a now huge upper middle class who are travelling the world, sending their kids to Australia or US for study and still buying Apple products. They are not going away. And ultimately they will change China into something more driven-by-internal-demand, civic, modern ... even democratic.
We've seen this movie before... Back in the 80s it was called "Japan". Everyone was making money, Japanese investors were spending billions on real estate, brands, etc. The ending didn't go so well.
But China is no where near where Japan was in 1990.
You can see that if you compare GDP pr. capita figures.
I'm genuinely not being sarcastic, I wouldn't have the faintest idea where to start looking for an answer to that question otherwise.
In the west we have this opinion that an economy should under go the maximum amount of growth at all times and so from that perspective Japan looks like a basket case and yet they have a good standard of living, an excellent life expectancy and by most measures are a successful country.
That said much of what happened in Japan is worth study in the greater world, the suppression of wages and the liquidity trap (their debt is 240% of GDP) have analogues in the western world.
The main reason for this belief is that we have a distorted view of economy. For economists, business growth is the only thing that matters in a society. On the other hand, 99% of the people in a country don't really care about economic growth (above some basic comfort level of development, it must be said). This happens because most people live of wages, and wage growth is slow and sometimes non-existent (as presently in the US).
The standard growth oriented view of economy is important only for investors (people making money in the stock market and bond market), and business owners. Normal people will live perfect fine lives as long as the economy is not imploding.
It is politicians and developers who put a value-judgement on growth - specifically GDP growth. And they are perfectly rational in doing so. In most jurisdictions the developers hire the politicians and so they adopt that value-judgement. The other 99.9% of the constituents are largely ignored on this topic.
https://en.m.wikipedia.org/wiki/Lost_Decade_(Japan)
It's also interesting to review old films and media from the late eighties (Gung Ho, and Die Hard). It's hard to comprehend if you didn't live through it, but there was a massive level of anxiety in the US that Japanese business culture and management prowess was going to be impossible for the US to overcome, and that th US was in decline.
The Asset bubble in Japan was so insane that at one point the nominal value of the Imperial Palace was equal to the value of all property in the state of California. Aother good Wikipedia article to read is this one:
Certainly there was also significant attention to some of the more specific processes and practices associated with Japanese manufacturing (and far less to US manufacturing) at the time, which have been largely proven out. (And are arguably being reflected in a lot of modern DevOps software practices.) However, a lot of notable economists and others were also calling for much more systematic cooperation/planning between government and companies (especially manufacturers). Sematech was an example from the semiconductor industry.
[1] https://en.wikipedia.org/wiki/Ministry_of_International_Trad...
From 1990 to 2013 Japan's per capita income actually doubled, translating into over 3% growth per annum.
> Why aren't they getting married?
> There are both cultural and economic barriers. In Japanese tradition, marriage was more about duty than romantic love. Arranged marriages were the norm well into the 1970s, and even into the 1990s most marriages were facilitated by "go-betweens," often the grooms' bosses. Left to their own devices, Japanese men aren't sure how to find wives — and many are shying away from the hunt, because they simply can't afford it. Wages have stagnated since the 1990s, while housing prices have shot up. A young Japanese man has good reason to believe that his standard of living would drop immensely if he had to house and support a wife and children — especially considering that his wife likely wouldn't be working.
http://www.tradingeconomics.com/japan/gdp-growth
Japan has been suffering from low inflation and at times deflation. This means that debts do not shrink with inflation. I think the stockmarket and property markets have been pretty flat too over the period. What growth there has been has been assisted by "extraordinary" (well they were before 2008) monetary measures and growth in government debt to 230% of GDP.
- When a country is completely modernized its growth tends to plateau; no good investments left (in say infrastructure, health, education and so).
- The Japanese Yen got too strong. Japan got stiffed at the plaza accord. After the 2nd world war it took 300 JPY to buy one USD. Today it hovers around 100.
- Japan's skewed demographics. Too many elderly. Too few young. Little immigration.
- Japan's conservatism. I.e big consumer electronics giants unable to transition into software companies.
- Too much debt. Economy caught in a debt deflation / liquidity trap.
- Competition from Taiwan, South Korea, China.
- The big bubble was never allowed to pop and clear. Leaving zombie companies, slowly falling asset prices, bad debt for many decades ...
http://www.amazon.com/Rising-Sun-Michael-Crichton/dp/0099233...
My current thinking is that capital outflows will increase the worse the situation gets until China cracks down in a major way, or they are tapped dry.
So there will be bubbles, but I have little doubt that they will have a higher growth rate than the west for quite a long time. Once they become fully industrialized, probably not.
We can tell the same story about India, BTW. The last deca might have been terrible for the EU and the US, but it has been amazing for Asia. It's only not been quite as good for Africa because so many countries the hare horrible governments.
[1] http://priceonomics.com/surveying-the-ghost-cities-of-china/
I thought so too. But it doesn't seem to be the case. Growth in productivity has been in steep decline over the last 50 years.
Not really. I mean, there is shanghai and shenzhen, but the rest of eastern china is very much like...
> But large parts of the country are still poor, rural and remote.
Infrastructure has definitely gotten better, but a lot of capital has also been sunk into white elephant projects and...
> Houses are built for people to work in the city doing high-productive factory jobs where they before were doing small-time farming in the country side.
Those aren't the houses that are being built though, rather they are focusing on luxury apartments that migrant workers will never be able to afford.
> This is a massive lift in real economic activity which can finance a lot of debt.
If the debt was spent wisely, yes. But a lot of the ventures are dubious (lux apartments), farmers still can't mortgage their land or acquire urban hukou anyways, and wealth descrepency is only getting worse.
> Completely incomparable to the expansion of credit to low-income families to finance housing that gave the boom in the US and other western countries from 2002 to 2007.
Agreed. Those kind of people would never get a loan in China. The money has been mostly lent out to those with power and connections, a lot of that money won't be repaid because it was invested very unwisely.
> Secondly there is a now huge upper middle class who are travelling the world, sending their kids to Australia or US for study and still buying Apple products. They are not going away.
Uhm, ya, well, they aren't leaving the planet, but many of them are definitely leaving china. What do you think that apartment in Vancouver they bought is for?
I'm not so sure, although we've been hearing it for years. If anything, China's reign in Hong Kong shows that people are more or less willing to put up with autocracy as long as material conditions are good, and that's in a population accustomed to a more free society.
Another illustrative story of the forces at work in a semi-translucent economy.
[1] http://english.phbs.pku.edu.cn/index.php?m=content&c=index&a...
I would rather worry about the flipside scenario, that China is in better shape than most Western analysts fear.
1.) China's construction boom is over
2.) Need to understand China better
3.) Take off the rose-tinted glass
I would add a few more here:
4.) With all the capital controls currently in place, once you invest, you might not get your money out, ever.
5.) With president Xi becoming more dictator-like, and encouraging anti-foreign behaviors, once you get in to China, you might easily get in trouble. Jailed without trial. Or disappeared.
6.) With the great firewall becoming more restrictive, and VPN working less and less, you might not be able to hit any foreign websites from China. No communications with your family or loved ones. No search for foreign customers.
7.) With the impending yuan devaluation (20%-50%), it might not be worth it with a low growth environment in China.
China's already hit its limit. "Also, the Chinese economy is over-indebted. The total social debt is now 300%. Together with external debt, this figure rises to about 350%." http://marketrealist.com/2016/01/george-soros-sees-crisis-re...
> Secondly there is a now huge upper middle class who are travelling the world, sending their kids to Australia or US for study and still buying Apple products. They are not going away
"their buying power doesn't compare with that of their US counterparts. Between 2010 and 2014, only 12% of these people reported a household income of more than $3,200 a year, or $8.50 a day." http://www.businessinsider.com/demand-report-on-chinas-middl...
There is good and there is bad debt/investment.
If debt is used to finance productive investments then a high debt to GDP multiple is not a problem, it is in fact a sign of health.
Secondly if GDP growth is high and interest rates are lower then debt is much less of a problem in general.
> "their buying power doesn't compare with that of their US counterparts. Between 2010 and 2014, only 12% of these people reported a household income of more than $3,200 a year, or $8.50 a day." http://www.businessinsider.com/demand-report-on-chinas-middl....
These numbers are off by a factor of 10.
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Of course the future is anyone's guess. Personally I think China is going to continue growing at a high pace until its GDP pr. capita matches Taiwan, South Korea or Japan.
We already have the answer on that one, and have for a long time. The return on debt - the growth derived from taking on increasing amounts of debt - for China has plunged the last ten years. At this point, taking on more debt accomplishes absolutely nothing in regards to growth. They've saturated their ability to grow using those methods.
Their GDP per capita can never match the equivalent of Japan today. That's implying a Chinese economy that is nearly the size of the entire global economy today. That's the same kind of hype and absurdity the article is talking about. Where is the next $40 trillion in GDP going to come from? They're struggling to grow their economy at all today (and yes, the 6.x% figure is pure fiction), while taking on tens of trillions in new debt. If they can't grow their economy today, with that much debt financing, when will they be able to? The answer is: the party is long over, the only thing left now are consequences to all the bad choices that led to China becoming the world's most indebted nation in record time.
> These numbers are off by a factor of 10.
Support your position then.
Yes.
> Support your position then.
The Business Insider article mistankenly says pr. year where it should have said pr. month.
Sharetea must have somehow stumbled on this as he introduces a "." in the quote so 85 USD becomes 8.50 USD.
The correct numbers are in the report:
http://demandinstitute.org/demandwp/wp-content/uploads/2015/...
"Only 12% reported monthly household income of more than 20,000 yuan ($3,200), or $85 a day."
Where group that is referred to is the group of "connected consumers". The group is 368 mio. Chinese pt.
We detached this subthread from https://news.ycombinator.com/item?id=11385444 and marked it off-topic.
I do wonder how many times the Austrian school will be proved right before the public start to notice.