My last two blogs mentioned the unknowns regarding China. It seems that I am not the only one thinking along those lines. In the newspapers last weekend, there were columns devoted to China.
The Issue
Everyone assumes that China is the key driving force in the world regarding commodity demand, import / export transactions, currency issues, etc. I have often heard the comment that China is consuming and demanding more and more resources and that the world is busy supplying those commodities to China.
But what if China itself also has problems. In the Toronto Star (Sunday, May 15, 2011) I quote “Even by Hong Kong standards – where a half-dozen demonstrations occur daily – the protest over a government budget here was remarkably rowdy.” The article goes on to discuss the one child policy (that I have often noted as a signal of dangers to come), frustrated youth, tremendous gaps between rich and poor, public housing shortages, people living in rooms as big as closets, and so on.
It seems that there are a number of suspicions regarding China being the world’s economic savior.
Vitality Katsenelson
One of the speakers at the New York Hard Asset Show was Vitality Katsenelson. His website is ContrarianEdge.com. I mention this reference because the following is a partial summary of his comments.
Although I don’t fully agree with his views (I will state mine following), I will try to give you the essence of his presentation. If I misquote I apologize and will retract or correct upon notification.
Central Party Control of the Economy Always Fails – Sooner or Later
China is a calamity waiting to happen, and when the calamity occurs, it will take down not only the commodity market, but the world economy with it. The only thing not known is when this calamity will occur. The issue here is CENTRAL CONTROL. Sooner or later, all centrally controlled economies, regardless of the name given to them, collapse for very basic reasons. Central government control does not work. It creates distortions, falsehoods, enormous bureaucracies, and economic dislocations that sooner or later collapse under their own weight.
1/3rd of the economy in China is controlled by SCE’s (State Controlled Entities), and this large degree of control essentially controls the other 2/3rds. Government policies control the SCE’s and they control the economy.
China needs growth – it needs lots of growth – to pacify the population – to give benefits to the people – to keep the government in power.
Why Reporting to Government is Flawed
Imagine a government bureaucrat giving his monthly report to the next higher up person. He can either report growth and prosperity, which is what is demanded by the state, or he can report failure and lose his job, or be imprisoned. Guess which report will be submitted?
How is this Economic Miracle Occurring?
In China, there are numerous cities of enormous size with zero or few inhabitants. We all have seen videos of these beautiful empty buildings and empty streets, and empty shopping malls. There are 64.5 MILLION EMPTY APARTMENTS.
Doesn’t it seem apparent that something is out of whack here.
6% Growth
China has expanded because of exports to the world. China’s exports are enormous, and have fed an economic cycle. China claims a 6% growth in GNP last year that is admired everywhere. Most of the rest of the world was stagnant.
If reported exports by China dropped 25%, how did the economy grow 6%? If shipping tonnage dropped, if railway carriage dropped by double digits, how can there be 6% growth? Does it remind you of the old USSR? Tremendous growth yearly – until it collapsed.
Banks and Lending
Consider the money loaned by Chinese Banks to fund all of these enormous real estate projects, which have no tenants, no buyers and no occupants. Would your bank, if they had been foolish enough to loan the money to build these projects, remain calmly by with no income coming in to repay the debt?
In China, the banks are not only controlled by government, they are owned by government. So all of the bad loans and enormous debts of the banks are in reality debts of the government. These debts, together with the other government debts are so large that they are only slightly less than the enormous 2.3 trillion US$ held by China in currency reserves. In essence, the currency reserves are a myth.
There are many more statistics and examples, but I think the point is made.
Cymor’s View
We have mentioned cautions about China a number of times, but the stark reality portrayed by this speaker was still quite graphic.
We think that China will have bumps along the way. We think that if the economic recovery was solely dependent on China, we would all be in trouble.
China reminds us of Greenspan’s horrific legacy. Do not let the economy have a downturn. Print money. Do anything. Let the future pay the price. China’s policies will have a similar effect – China will suffer. Whether it will melt down like the USSR did, or whether some other effect will predominate, we do not know.
The Recovery Will Continue
Whether China falters or not, the recovery will continue. Just look at the increasing amounts of shoppers roaming the malls, the increased travel and lack of vacancy at vacation spots, the increasing activity in web activities, the booming stock markets and so on.
The USA is recovering as will Europe, and will take up the slack created by downturns elsewhere. In other parts of the world, too many new middle class people have been created that all demand goods and services.
Each economic downturn unfortunately leaves distressed people in its wake that don’t recover. Unemployment always lags recovery. As the world advances, more the last wave get left behind, while the youth and the nimble achieve greater wealth than the last great wave created.
The next big thing, whether technology, or communications, or space travel, or marvelous advancement will create the next wave of prosperity.
