Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Guidance and Visibility -- Ignore unavailable to you. Want to Upgrade?

To: 2MAR$ who wrote (87140)	5/11/2003 5:22:08 PM
From: 2MAR$	Respond to of 208838

Broken China A. Gary Shilling, 05.12.03, 12:00 AM ET Is the world's largest nation a wonder of growth? Don't believe it. The growth figures are cooked. A lot of problems are kept out of sight. Think Japan, 1988. If you think China is the economic wonder of the world, you have plenty of company. The country reports that its gross domestic product is rising 8% annually at a time when fully developed countries are stagnant. It is enjoying the good deflation of excess supply, driven by rapid industrialization and Western technology. China is the global low-cost producer of a widening array of manufactured goods. For many U.S. manufacturers the choices are these: Slash prices and costs to meet those of Chinese imports, move production to China or fold up shop. Other Asian lands ran out of unemployed people as they developed and had to shift to more sophisticated output to accommodate increasingly expensive labor. China has not. Almost half of its 320 million farmers are not needed to work the land, by the reckoning of the Ministry of Agriculture. There are around 80 million redundant workers in government and government enterprises, not to mention the 100 million squatting in the coastal regions, looking for work, and also the soon-to-be-employable youth--a quarter of the Chinese are under age 15. So China has 500 million potential new workers. How long could China maintain 8% annual economic growth before exhausting this huge pool of unemployed? About 30 years, assuming 4% annual productivity growth--no great feat for a developing country that can adopt modern technology. Also, the growing Chinese middle class promises strong domestic demand, which will reduce dependence on exports and lead to greater imports. Maybe one day each of those 1.3 billion Chinese will drink one can of Pepsi. But if you are awed by China's current and potential power, think twice. Recall the awe over Japan during its 1980s bubble days. Remember how we were all going to be sweeping up around Japanese computers? My contrarian forecast in 1988 was that Japan's bubble was about to break. I feel the same way now about China. To begin, I don't believe China's official 8% growth figure. It's a politically mandated number, first conjured up in 1988 by Chinese officials. Independent surveys of industrial capacity, energy use, employment, consumer income and spending and farm output imply much slower growth. Chinese from the top down have long known this: In 1999 Premier Zhu Rongji complained that "falsification and exaggeration are rampant." The official 4% urban unemployment rate jumps to 9.3% when laid-off workers, who receive modest stipends, are added to the registered unemployed. And while the official poverty rate in cities is 2%, the Asian Development Bank estimates it's 11%. Note that the 1989 Tiananmen Square demonstrations were preceded by urban labor unrest. So China needs rapid growth to employ the urban idle and the inflow from farms and to fund adequate roads, housing and farming modernization. Huge education outlays are needed to turn those rural youths into productive urban workers. Pensions and social security, new to China, are gigantic money sinks. The military is another big drain. China also has to rescue the state banks, which are essentially broke because of the bad loans used to support equally bankrupt and overstaffed government-owned businesses. What's more, China's two recent growth engines are highly vulnerable. First are exports. Official data show that from 1997 to 2001 exports averaged 21% of GDP but accounted for 48% of GDP growth. And most of those exports go directly or indirectly to the U.S. American consumers have ended their 20-year borrowing-and-spending binge and are embarking on a saving spree, which I forecast in past columns. So the outlook for Chinese exports is glum. Ditto for foreign direct investment in exporting businesses that employ 6 million. Government deficit spending is the other growth source, and it's under pressure. Officially China is running a surplus equal to 2% of GDP. The reality, though, is that if all the off-balance-sheet financing and capital outlays are included, the country is running a deficit of at least 4%. Government debt, 17% of GDP, may seem small, but potential liabilities run that to 150%, gigantic for a primitive financial structure. As for the Chinese middle class, surveys dispute government data and show that both urban and rural consumers are, despite falling consumer prices, big savers, not lavish spenders. China will continue to be the low-cost producer of many manufactured goods. Beware, though. The nation's attention may be diverted by domestic unrest and restructuring problems. This could hurt both securities investments in China and foreign direct investments. A. Gary Shilling is president of A. Gary Shilling & Co., economic consultants and investment advisers. Visit his homepage at www.forbes.com/shilling.