I’d like to take a moment to clarify some of your misunderstanding about China: “Chinese people are so used to the government running everything, they believe that the government is in control of everything too.” This is a gross generalization from someone who get their information on China exclusively from CNN. Quite to the contrary, the central government right now is struggling to control the economy. Legislations putting caps on production capacity and central bank’s hawkish signals were to no avail. Policy-making in China is subject to a delicate balance between growth and equality, and the best the government can do is like the old saying “touch the stone to cross the river”. To CCM, the linked article has a grain of truth to it. But it is by no means an accurate picture. When you take Purchase Power Parity into consideration, $1 goes a much longer way in China compared to the US. Moreover, poverty is concentrated in China’s countryside. Farmers’ crop yields to feed family is not a monetary income and is usually excluded from GDP calculation. China’s economy is the second largest by PPP standard, but this is not entirely accurate neither, given services are not transportable. So the truth, I believe, lie somewhere in between. bchadwick, agreed with you on the frothiness of asset markets. However, you seem to exptrapolate general social unrest from a correction in the financial markets. This is false. While the stock and certain real estate market appear bubbly, China’s underlying economy is very healthy. Consumer spending is picking up (see the smog surrouding Beijing due to increased car traffic), and any slow down in exports due to US recession could be compensated by increased government spending (China is one of few emerging economies with a budget surplus, at least on paper…). I’d say the real risk to trigger social unrest is a pullback in employment, which is not likely given the strong underlying economy. And finally to WillyR: the real estate bubble in China is limited to select metropolitan areas, namely Beijing, Shanghai, Guangzhou…If you look at nation-wide numbers, housing inflation is very mild, certainly much tamer compared to what we saw in the US, UK and Ireland in the past a few years. The price speculation in metropolitan cities was fuled by isolated supply/demend imbalance, when affluent people from around the country (or around the world, for that matter) come to BJ and SH and buy a few apartments at one time. Hope this helps.
CCM…artifically low currency only implies that the people as a whole are paying a cost and that there exist economic inefficiency from a static point of view. however, articially low currencies can have their long term benefits if it can spur domestic innovation, growth and infrastructure building. in and of itself, a art. low currency doesn’t say all that much. empty towers are bad but its part of the cycle. inflation is also bad but it can also be the “greasing of the wheels”. i’ll have to look a bit more onto the inflation thing. the stock market is not that big in china as of yet. the crashing of the market will only delay the inevitable. i believe they’re moving in the right direction. if you’re comparing the chinese to the japanese, you’re still dealing iwth a power house. Japan is a monster, and yes, their economy slowed but only after people were living well. china is way behind them in terms of technology so in terms of economic stagnation and catching up to the LT growth rate, they still have miles to go. for a happy ending in japan, it is certainly more then 13.50. when the happy ending index approaches that of the japan, then you can compare them on a equal level. but one country is catching up and the ohter is of the leaders. not a fair comparison.
bchadwick, foreign investment in mainland’s equity market is very very limited. The governmet only dispatched around 20 licenses for foreign institutional investors to invest in RMB market (Qualified Foreign Institutional Investors, or QFII), each with approximately $2 billion cap. Now, since the issuance of the licenses, these investors have not used up their cap at all. What is China’s liquid market cap today? around $800 billion? This is not Southeast Asia in 1997… China’s stock boom is fuled by retail investors, ordinary Chinese people. The country’s savings is around $2 trillion, doubling the foreign reserve. Like I said, I see a real chance of a mild correction, but by no means panic selling. Remember, financial market performance is anchored in underlying economic development. Plus, there are plenty domestic smart money on the sidelines right now ready to step in at the right valuation.
Nice informative post, Beijingbadger. I agree that maybe I linked market corrections to social unrest too quickly, and I agree that the underlying economy is pretty healthy right now. I mean, I can’t see the world saying, “oh, the Chinese stock market has crashed, so lets get our products more expensively elsewhere.” If there is a crash, I can see that there might be difficulties in raising capital for CapEx, but that would affect productivity down the line, and not bankrupt any others right now. The social unrest concern is more relevant to a general economic slowdown, where the current deal seems to be “keep your mouths shut about political matters, and we’ll let some of the economic benefits trickle down.” If the trickle down doesn’t end up happening, then you are likely to get massive unrest, which will definitely make things “interesting” in the Chinese sense of the word. Admittedly a general slowdown doesn’t seem to be in the cards for now, but financial difficulties have this strange tendency to work its way into the rest of the economy. I think that the parallel to the Chinese experience today is Japan in the 1980s and (even closer) the US in the 1920s. If there is a financial crash, what’s likely to happen is that different parts of the new wealthy are likely to be fighting over the remainders of a smaller financial pie, and people who have taken too many risks will fight over whether they are bailed out or sink under. If that splits and you have some of the new wealthy team up with labor concerns elsewhere, then you may get the kind of disruption that will spill over into the general economy. These are just scenarios to be aware of… no one knows how things will actually unfold until we get there.
Frank, You bring good points but a few things: 1)Obviously development is good for China as a whole and I think that everyone here would agree that in the big picture and over the next centruy China/India will broaden the base of the worlds large economies and will come into there own and that will be good for everyone. 2) That said the most dangerous words ever uttered in investing are “this time its different” and those words have been spoken with increasign regularity in regards to China as they were in regards to Japan in the 80’s where a deficit spending, weak dollar, faltering economy USA looked ready to turn over and die. If the conditions I mentioned can stymee the world second largest economy then they can casue serious problems for a developing nation like China. The US had a serious depression in the late 1800’s when it was the world second largest economy and again in 29-39 when it was by far the largest so size alone is no proof against economic problems. 3)The market does not have t be big to have a seriosu psychological impact on everyday people. Look at the way we still ralk about Black Tuesday. 4) Low curency does not casue a problem except when it is kept artifically low which creates havoc when markets are allowed to correct to the intrinsic value. Just look at the manufactures in Ont. Juast imagine what woudl happen to the RMB if it was allowed to free float against the Euro/USD gievn tChinese inflows. To putit mildl walmart would find someone else to make there stuff and then where would the economy be? Lets not even mention much higher inflation in thinhs liek rice and pork and what woudl happen if the Chinese Govt stopped subsidizing oil…
I sure liked how most of the scooters were electric in Shanghai. They were quiet and didn’t stink. Obviously, central planning worked in that instance. I went to a retail securities broker. They have a huge lounge where everyone day trades. It reminded me of OTB in NYC… not a confidence builder. I get the feeling that the selfishness of the Chinese people is limiting their potential. All the people being born over there are “only childs”. They already have a reputation for being greedy, not team oriented, etc. Have you seen them drive? It’s a rule-less, free for all. Whereas when I think of other great societies I see humbleness and team spirit… (ie America, Germany and Japan). I talked to an expat Japanese farmer who is growing mellons outside of shanghai. His profit margin on these specialty mellons is outrageous. I asked him why others don’t copy him. He said the other farmers have stolen his mellons for the seed (even after he offered them free seeds). He said they haven’t been succesful because they don’t have the discipline to cut back the vine. The mellons never come out as sweet. Also, he said that in Japan the farmers share their secrets and compare the most succesful crops, whereas in China they tend to work against each other. Anyway… I wonder if anyone has done some sort of sociological study on the effects of a society that consists solely of “only childs”?!? Joey? What does you shrink gf say about that?
virgin, i have seen some of the “selfishness” myself…though i really wouldn’t want to generalize…
I think the fact that you have a generation that never grew up with brothers and sisters bodes poorly for China. At least one and maybe two generations has never had to share with brothers or sisters. Another generation will grow up without uncles, aunts, or cousins, meaning parents won’t be able to count on brothers and sisters for help in child rearing. The ratio of old to young will grow even more rapidly as China tries to figure out how to support its aging population - a problem usually associated with “wealthy” countries (on a GDP/capita basis). But I think the lack of learning to share with siblings is going to cause problems down the line. Consider that people learn to deal with each other as equals in certain contexts: as siblings (nope, don’t have that), in political or neighborhood associations (nope, don’t have those), in religious congregations (sorry, we don’t support that, though we don’t oppress it anymore either), sports clubs (maybe we have those), and student organizations (gee, that Tienanmen thing worked out well, didn’t it).
That Keidel report sort of hints to the nebulous quality of reports coming out of china. willy
Can somebody use EHM to define china security market? I guess it’s not strong, or semi-strong ,or weak. If we assume it’s very weak and no regulations at all (even no ethics) how do you make money from a very weak security market? Insider trading? Can you use ethics code you learn from CFA exams to make money from china security market?