After a decade of brain dead hype about the glorious future of China – reality is catching up – apparently with alarming speed.
Below is a good article on the topic as well.
Jim O’Shaughnessy: Revisting The Ideas Buried In The Graveyard
ValueWalk's Raul Panganiban interviews Jim O’Shaughnessy, Chairman, Co-chief Investment Officer, and Portfolio Manager at O'Shaughnessy Asset Management. In this part, Jim discusses revisting the ideas that got buried in the research graveyard and his favorite books. Q1 2020 hedge fund letters, conferences and more Oh, man. Yeah, for the the research graveyard, do you ever Read More
Now back to the issue:
Let us set the record straight now there is chance of being heard over the cacophony of self appointed “experts” with “experience” and the ”wisdom” of real estate brokers banker. All reiterating a totalitarian regimes propaganda and “statistics” read from a lottery ticket.
Up to 2007-8 China expanded economically on several fronts both domestically and abroad. The economy was extremely export driven by an undervaluation of the Chinese currency – necessary because there wasn’t competiveness behind the production and there wasn’t real interest in the West.
The lack of competiveness should have been apparent to all – but wasn’t – because when you sell your stuff under the purchase price of the imports going into the production? Well there is a time limit to that success.
The lack of a serious market should have been abundantly clear when the extension of credit to ever decreasing interest rate grew out of bounds.
With Lehmann Brothers folded ungraciously it became clear that the export market wasn’t going to support further expansion. The overbuilding of housing, infrastructure and industry stepped in to prolong the horizon with two-by- fours. It is no art (just banking) to lend to developers that have neither the capacity nor the intention of ever paying back – nor to ordinary people that have to pay king’s ransom for a shack.
Some took broad hints back in 2007 seeing cities being built without inhabitants in China.
But let’s get back to basics!
The real problem is that China cannot feed itself. Chinese agriculture employs about 500 million people (give or take a couple of hundred million – immaterial to the argument) with a food production in the same order of magnitude of the USA – that employs ONE million in agriculture.
The problem for China is not rationalization of their agriculture – that only produces unemployment – but the TOTAL production. Total production of food in China cannot be augmented to any appreciable extend.
If you have seen pictures of Chinese terraced rice paddies and compare them to the classical films of Midwestern corn fields in the USA – you might understand that every last straw of rice is already being produced in China. There is no production gain in using more manpower – on the contrary – presumably.
To get away from the endless poverty of the countryside China has forced industrialization. That just moved people into the cities where there was nothing to do, as the dirt poor farmers wasn’t a market for the industry’s product – they could hardly produce enough for their own belly – a condition worsening with increasing population.
This is another misconception: The increased population is NOT due to too many births. It isn’t: It is due to the fact that people live longer – also in China. All of them need one square root meal a day.
The only option was to start exporting ruthlessly – no matter at what cost. The cost was to begin with Chinas own natural resources, but now there aren’t any more. The reports on the state of the mining industry have ominous echoes of the pre WW2 descriptions of European industry. It wasn’t Maggie Thatcher that killed British mining – the mines got deeper and the grade of ore worse and the work more dangerous and expensive due to safety.
To begin with there was a market for products produced at no labor cost. But that meant food had to be subsidized – this is precisely the wrong way of producing cheaper food for workers. Let food prices rise and farmers will rationalize in greed – go bankrupt; but eventually produce cheaper food.
This leads to social inequality and that makes the food supply even scarcer, as a pound of meat takes 3 or 4 pounds of grain to produce. All the cheap options – such as grass for milk producing cattle is already gnawed of. Look at the food scandals in China concerning toxic additives to stretch milk production.
The situation is now, that China has build up a fortune in US Bonds that is as useless as the gold they can’t eat. As Alan Greenspan said: “We can promise we will pay; but we cannot guarantee what it will be worth.”
The fact is that when an economy as large as the Chinese starts a shopping spree – prices will go up. Not only that; but reviving the dead capital locked up in zero interest bonds will set inflation ablaze. Now isolated to food – that won’t matter very much to the West, as food (especially if you prepare it yourself) does not carry any weight in a Western consumer price index. But believe it, it does in a Chinese – and I don’t for one second take the official figure of 30% for even a distorted reflection of the truth – trimmed of lipstick and breast implants – it is far more.
The housing market is generally the first place to observe a collapse. Prices have been driven up so high that people cannot afford a condominium and sellers can’t afford to sell at market prices. When jobs in construction disappear on top of export jobs you have a starving proletariat concentrated in the world’s largest cities. This will get ugly.