The New Infrastructure in China
When one sees the marvelous infrastructure developments in China, compared to the older and somewhat crumbling infrastructure in the Western world, one has to marvel. There are so many roads, railways, bridges, skyscrapers, malls, hotels, and so much more. It boggles the mind to see the vastness of all of this construction.
Empty Cities
We all have seen the videos of the empty buildings in China, the cities with no people, the vast parking lots with no cars, and so on. Yet even with this disturbing information, the sheer scope of this construction is awesome and inspiring.
How to Invest in This Economic Miracle
The issue here is risk. Investing always involves some degree of risk, and the basic principle of investing is to minimize risk and maximize return.
We have written before about this marvelous part of the world and how we would invest to take advantage of this booming area. To summarize our previous remarks, investors should use caution and invest in companies and in geographical areas with which they are familiar. Invest in companies that profit from dealing with all of this marvelous construction, not with the actual builders of the infrastructure.
Is There Anything Wrong With This Picture of an Economic Miracle?
We have also written previously on this subject, and the comments made still seem quite relevant. There definitely remains a significant danger of economic surprises from China.
Understand the Need of Reporting Accomplishment in a Centralized Controlled Society
One of the points that illustrate the uncertainties of China, is to understand how the centralized economy works.
Imagine a “City Manager” is some province who reports to the central committee on a regular basis as to economic activity in his area. Now imagine that surrounding cities in his province have reported growth of 9% this year, and construction of 60,000 new square meters of construction.
What do you imagine would become of the guaranteed job security of that “City Manager’s” job, if he reported economic growth of ½ of what his surrounding districts reported?
So what are his options? There seem to be two options. First option is to report great results regardless of the facts of the situation.
The second option is to create IN ANY MANNER NECESSARY the performance expected. Here “UNDERGROUND DEBT” comes into the picture.
A New Subway Line
Here is but a single example of what is happening across China. Witham, a Chinese city with a population of 9 million, is building a subway line of 225 kms, rather a very large project. This project is expected to take only 7 years, which in of itself is really quite remarkable. In North America, it would be realistic to build about 10% of this amount in the same time period.
However this new subway in Witham is only one bit of a master plan that includes new airport terminals, new districts in the city, promenades, and massive new office towers. The undertaking is so large it is breathtaking.
Such enormous projects have become a major part of the Chinese Miracle. As exports to the western countries falter, intern Chinese demand is soaring. Projects like the one described are producing major economic activity and growth rates that are the envy of the world.
But how is this all possible? Perhaps the Chinese have developed a brand new economic system that puts the old Capitalist system of the west to shame.
How is it Possible to Pay for Such a Massive Project?
Is the way the system works, that these projects are financed? It is possible that Chinese Municipal governments, which are the engines of the current Chinese Miracle, are already sitting on enormous amounts of debt – hidden debt.
It is great to spend money and build things, but somehow this debt must be repaid in the future. Western countries, having spent with abandon for decades, are now discovering to their chagrin, that unmanageable debt is a very bad thing. This debt is threatening the very stability of our economic system.
Next – The Perils of Local Government Spending and comparisons to other countries, & Special Investment Corporations – the Chinese version of Off-Balance Sheet Financing
Much of the information given in this blog was obtained from an article in the National Post of July 8, 2011 written by David Barboza.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
