11 January 2010

China's Economy: More Bubbles Than Lawrence Welk

China needs to depend more on improved efficiency for growth. But instead, the recent trend seems to be going the other way. Rising costs and weak demand are making manufacturing less profitable. Hence, capital investment is weak, as reflected in weak equipment import data.
Most local governments seem to embrace property development as a growth savior. But shifting surplus capital into property is likely to lower future growth by decreasing average capital efficiency. This deters consumption development by increasing property expenditure expectations, and threatens financial stability by increasing loan levels, using overvalued land as collateral.

...Xie says that China’s growth model is unsustainable because it produces what I would call a Latin American style distribution of income where the middle class is quite small. These comments echo thoughts from former Xie’s Morgan Stanley colleague Stephen Roach, who sees an economic safety net as critical to increasing domestic demand and forming the middle class of which Xie speaks.

Bottom line, China’s economy is a bubble economy right now. And bubbles do not deflate; they pop. _SeekingAlpha

...China’s educational system, despite all the money it receives, remains inappropriate for a modern society. Hu Jintao, China’s leader since 2002, has been reinvigorating Marxist education and reinforcing orthodoxy. That’s great, but only if you want to know what Engels or Mao thought about the value of labor or why the Communist Party must maintain a monopoly on power.

...Today, the failure to properly assess the output of small business is resulting in an overestimation of GDP because these enterprises, which tend to be more dependent on exports, are suffering more than the larger ones.

...Economic reform has stalled because China has progressed about as far as it can within its existing political framework.

Further economic reform would threaten the power of the Communist Party, so the Party will not sponsor much more change.

A true market economy, for example, requires the rule of law, which in turn requires “institutional curbs” on government. Because these two limitations on power are incompatible with the Party’s ambitions to continue to dominate society, China cannot make much progress toward them, at least as long as the Communist Party is around.

... _Forbes (Gordon Chang)_via_BrianWang
 Another skeptical look at China's economy

China's economy has prospered based upon several unsustainable factors. Among them are very low wages, foreign investment on a monumental scale, a huge export market, the willingness to ignore environmental quality in favour of all-out industrial expansion, the iron discipline of the party maintaining a national sweat-shop imbalance of power, relatively low energy costs (up until 2008), etc. Foreign companies continue to invest many billions into Chinese projects, but China's tendency to steal technology from business partners is becoming annoying to some badly burned corporations.

The situation (of technology theft, piracy, and nationalisation) is not nearly so bad in China as in Russia and other parts of the kleptocratic third world, but that could change quickly.

Top down, command economies are unsustainable in the long run. Without huge outside investment, China would not have grown even 1/10th the rate it has grown. If outside investment flees China for one reason or another, we will see just how unsustainable the CCP dictatorship truly is.

The current bubbles in commodities and real estate will reveal the brittleness of China's economy, when they burst. That will have most unfortunate repercussions.

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Blogger Sojka's Call said...

So, in the midst of a bubble in China and an inflated US money supply and high US unemployment to name just a few economic indicators, what does one do? Whenever all the money supply data starts to point me to precious metals then I see your posts on never-ending commodity supplies at low prices and a Chinese bubble and that makes me take pause on gold/silver. I got burned in the meltdown last year that I clearly saw coming and thought that oil, nat gas and precious metals positions would insulate me from and I got whacked just as hard on the oil, nat gas and refinery stocks and many still have not recovered their previous value or hardly at all (especially the nat gas that was a big part).

And, what happens when Fannie and Freddie come crashing down?

Tuesday, 12 January, 2010  
Blogger al fin said...

SC: We discussed the oil price bubble here from 2007 through the summer of 2008. Sorry you got burned.

Natural gas is different due to the rapid expansion of shale gas supplies in the US the last few years.

Gold is a means of preserving wealth in bad economic times. Silver as well.

When governments seize private enterprise, tax and regulate an economy into privation, and grow far too large and luxurious for anyone's purpose except that of government masters and workers -- the people get restless.

Tuesday, 12 January, 2010  
Anonymous Anonymous said...

I hope that the Chinese do well, both for their own sake, and so the CCP doesn't blame the West for their problems.

Thursday, 14 January, 2010  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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