Well, frankly I find little reason to be bullish on China. There are major, major problems there that cannot be resolved quickly, and will only be temporarily delayed by government infusions, no matter how large.
For one thing, they developed two simultaneous bubbles: one in their stock markets, and one in their real estate markets. Both are now imploding; the stock market implosion began first.
Recall that the losses following the March 2000 bubble in the NDX were about $7 trillion over the ensuing 2 or 3 years or so, but that was offset by an increase in real estate values of about $8 trillion. That really cushioned the fall, but this can not happen in China since both markets are crashing simultaneously. This is the same disastrous combination that dismantled Japan's screaming economy in the late 1980s/early 1990s. Japan has never recovered from that, and 20 years after the bubble in the Nikkei imploded, the index is still trading over 75% below the highs of 1988.
Further, foreign capital investment that China so heavily depends upon dried up months ago, and continues to worsen. China's economy is heavily dependent on exports, and we know that the countries that are hardest hit in recessions are generally those that depend on exports. And, exports have fallen every month since December 2008.
Over 150,000 business have gone belly up in China over the past 18 months. Unemployment, which was already double digit, has been rising steadily. University graduates are a dime a dozen, cannot find jobs despite years of looking, and are grateful to find a position selling pirated clothes in the equivalent of department stores. The massive numbers of peasants that flocked to the cities to find jobs have now mostly left the cities, because even the manual labor jobs have dried up. And, these peasants are increasingly unable to make a living in the countryside, which is why more than 100 million of them flocked to the cities in the first place. If that isn't bad enough, the government, in conspiracy with Chinese capitalists, simply take whatever land they want, and use it to develop whatever project they decide to. Those dislodged are compensated very poorly, and with increasing frequency, the developers hire gangs of thugs to brutalize or kill any who object, with the full support of the government, which generally imprisons and often executes any remaining pockets of resistance. The "justification," of course, is that the land belongs to "the people." Private land ownership in China is still technically not permitted by Chinese law, so Chinese citizens lease the land.
One of the worst things about the Chinese economy, from a long-term strategic standpoint, is that they have little of value to sell to the world. The rise of Japan to the ranks of the world's leading economies occurred because the Japanese made tremendous investments in infrastructure and education. Then, they made the key realization that no economy becomes one of the world leaders by selling cheap labor and cheap goods. Rather, such economies generally must create innovative products (usually technologically-advanced) and/or services that the world desires. So Japan outsourced its cheap manual labor to southeast Asia, and concentrated on developing high-tech industries. All this was spectacularly successful.
But China has not followed suit. They have built out infrastructure, to be sure. But they spend comparatively small amounts on education. Worse, education in China used to be essentially free 15 or 20 years ago, but now everybody must pay, and they must also pay bribes if they want any kind of halfway decent education. Education even in the cities is supposed to be guaranteed through 9th grade (assuming one's family can pay). At that time, an exam is given, and roughly 1/3 of students fail, and cannot obtain further education (except training in some trade). Not surprisingly then, the education level of Chinese has been dropping, particularly in the countryside, where the vast majority of the population lives.
Even at that, higher education in China is mostly third-rate. So China has very limited ability to create technologically advanced goods and services, and is not developing the ability to do so. This is a dead-end road for sure. And, even if they did, there is no economic incentive to do so, since piracy is rampant (arguably the nation's #1 industry). So, anybody in China with any sense who creates some new product takes it overseas and markets it from abroad. But much of the industry in China capitalizes of cheaper black market imitations and stolen intellectual property.
But these are all economic reasons why I think the future looks grim in China. From the perspective of the stock markets, there is a more obvious reason that cannot be fixed: the Shanghai and Shenzhen markets are about 18 or 19 months into an imploded bubble. These markets were once trading at 6000, but began to collapse in late 2007. The history of bubbles indicates that the Chinese stock markets will not recover for at least another 25 years. And, before all is said and done, these markets will lose at least 80% of their value from peak to bottom. That means these markets will see a final bottom of 1200 or less. But the lowest point reached thus far after the bubble began to collapse was 1665. The Chinese stock indexes would have to drop more than 55% from current levels to reach the 1200 level.
So I think there are zillions of reasons to be bearish on China. That economy is relatively early in the down cycle. I think, based upon real estate cycles here vs. there, they are at least 2 years behind us. That, combined with the above, strongly suggests to me that things are going to get far worse in China and stay that way for a very long time.
And that brings up another issue. Some economists have estimated that to keep civil unrest within manageable limits, the GDP must grow by 6% to 7% per year. That's no longer a reasonable goal. And, incidents of civil unrest have increased at an alarming pace over the past 2 years, and have also gotten increasingly violent. If the rest of the world pulls out of the recession long before China does, and if the price of oil increases towards levels seen last year (that is certain, sooner or later), then a heavily oil-dependent economy like China that is already severely crippled by recession and twin bubble implosions in the stock and real estate markets will be hit very hard indeed. Under those circumstances, which admittedly are "worst-case" scenarios, I doubt that China could avoid widespread extremely disruptive civil unrest or outright civil war.
This will be an interesting story to watch unfold over the next 5 years, that's for sure.
WS |
