Sunday, June 13, 2010
By Nick Sorrentino
I was recently speaking to a friend of mine in Asia and I prodded him for information on the Chinese economy. I asked him if it was true that there were entire cities built devoid of people. He said indeed that was true. Essentially the main cities were full of people and cars, the second tier cities were struggling, and the third tier cities (First or second tier in terms of population in the west) were on their back with skeletons of apartment buildings dominating recently clear skylines.
Frankly, this is one anecdotal report. One does not make investing decisions on what could be an outlying perspective. But the reason I asked my friend for his view was because I was hearing similar stories from other sources. There is smoke coming up from China to be sure.
In 2005 I had the pleasure of listening to a speech given by James McGregor, the former WSJ China chief at Regent University. His book, One Billion Customers, had just come out and he spent the lunch hour telling us of the many peculiarities of doing business in China. It was a great speech and I would recommend his book to anyone doing business in the Far East.
After the speech he took questions. I asked about another bit of anecdotal information I had gathered from somewhere. I asked if he had heard about the 60,000 officially reported riots in the Chinese countryside. He said that he had and that this was a vastly underreported part of the emerging China story.
I logged that away.
There are a lot of pieces to China and how they fit together is incredibly complicated, and even harder to understand if one does not have a working understanding of the Chinese language. Of course within China there are many dialects that vary so much that much of Chinese TV is broadcast with subtitles for the local population. Just to add to the confusion for Westerners.
I am barely knowledgeable on China as my research methods show. However I am increasingly of the belief that the China the west has been sold for quite a while is not nearly as solid as we have come to believe.
Don’t get me wrong. I still think that much of the economic story in the 21st century will be written in China. But it will be far from a steady rise to first world status.
Much has been made of how the Chinese have been able to “manage capitalism.” This is a illusion. Yes, according to the official numbers things have looked rosy for over a decade. 10% growth year over year for 10 years is a remarkable accomplishment. The thing is we need to question the source of these numbers, a ruling communist party that seeks to maintain control at nearly any cost as it makes its way through the second Chinese cultural revolution.
Their central bank has screwed up as only a central bank can, by infusing way too much money into the economy in the form of stimulus in 2008. Now its got empty cities and inflation and riots in the countryside.
Again I still believe that the trajectory for China is up generally, however I also believe that in the relatively near future we will ask ourselves why we accepted the numbers coming out of China as long as we did. There is the very real possibility of a nasty Sino property crash that might just come on at about the time the sovereign debt bomb goes off in the “developed” economies. The implications of this are many and not clear. But if China implodes as debt hammers the West times could get even more interesting than they already are.
I personally could go for a couple of years of less interesting times.
Ah, who am I kidding. No I wouldn’t.