I have about 55% of my net worth invested in China (including all three of its oil companies) and I worry a lot about the mindless construction bubble and China’s banks all the time. However, I have recently come to the conclusion that things may take a turn for the better. I arrived at this conclusion by looking at China from the perspective of money flow. I can think of no reason why the Chinese export industry should slow down. On the contrary, I believe it will expand. Positive money flow begets a healthy economy.
I believe, as long as China’s export business remain healthy, all hell will not break loose. Up to now, the cash has been misdirected to real estate investment and infrastructures build up. While there is no justification for 20 golf courses in Beijing or empty luxurious apartments in Shanghai, the same cannot be said for freeways and bridges. In fact, LNG terminals, refineries and railroads are among those that will be built in the next few years, each for solving real problems. The government is putting a stop to the construction of more high rises.
As China is a dictatorship, it can very drastically change things at a lighting speed instead of waiting for market forces to exert their effect. Witness the success of the one-child policy, which in no small measure retards the growth of the population in the past few decades. Likewise, when the Chinese government decided to put an end to logging, it stopped overnight. If things get out of hand, the Chinese government can forcefully put a stop to the construction bubble.
I believe, with the bust of the real estate construction bubble, the millions of Chinese businessmen with cash in hand can very quickly switch to yet another money-making venture, namely, stimulation of internal consumption for those goods that are so cheaply made and sold all over the world. With positive cash flow, the transition from mindless construction to internal consumption may be managed without a hard landing or, indeed, any landing at all. There are 50 million government officials and 99.999999999% of them are corrupted. Each also support the life styles of about 7 direct relatives and 2 whores. So the number of relatively well to do Chinese consumers is about 500 millions - about 200 millions more than in the good old US of A. They will consume and consume even if the other 800 millions of Chinese starve. As such, 20 million cars are not enough to go around.
Other notes:
(1) I do not worry about foreign direct investment. A lot of the so-called foreign investment is the recycling of corruption gains (to the tune of hundreds of billions). As long as corruption continues, "foreign investment" will not stop. If corruption ceases (haha), money will remain in the rightful owners and no foreign investment is needed.
(2) Even though China’s banking system is rotten to the core, there is still the US$600 billions + foreign reserve in US treasuries to bail them out.
(3) Finally, even if oil consumption in heavy industries were to slow down, there is still the need to fill the strategic oil reserves starting in 2006-7. Apparently China is to put away something like a billion barrels eventually.
I would go as far as to suggest that our twin deficits may not drag the world into a recession as people think. Inexpensive Chinese goods not sold to the US can be sold to people with savings but who have until now, no TV, refrigerator, car or decent housing. It is about time the rest of the world knows the good life too. Inexpensive quality Chinese goods have ready market all over the world and there is no sign that will stop anytime soon. The living standards of China’s neighbors, for example have been raised as a result. India consumers can buy similar or better quality goods where they were once inaccessible (at 3-4 times the price of the Chinese goods). With improving living standard comes the increase in oil demand. Managed well, the world’s economy may not go down the drain with the dying dollar.
What about the US? Well, the Greenman will be gone soon, leaving us with a financial bubble as big as his ego. |
