Thursday, November 12, 2009

Will China Go Boom?

As a frequent reader of Al Fin's web pages - as I know all of you are - you've seen numerous articles questioning the conventional wisdom on the future of China and the Chinese economy. Many pundits in business, journalism and economics see China as a rising star that will soon overshadow every other economy as it steps over the United States as the dominant player on the global economic stage. It's hard not to view it that way considering what has happened in the last 20-30 years. Still, the one thing we need to consider when evaluating China's ascendancy is the little fact that they didn't get where they are today all by themselves.

The lure of an endless supply of cheap labor and lax environmental laws was irresistible to the world's 3 largest and most technically advanced entities. The U.S., Japan and Europe have sunk huge amount of capital and resources into China. The hard liners in the upper reaches of the (communist) Chinese government have not let the Americans or the Japanese run all over them and have kept an iron grip on the ultimate control of all these enterprises foreign and domestic. On paper it looks like a brilliant strategy - but it might be the very thing that sinks them in the end.

Well Al Fin has company in his skeptisism. This week Politico the fine political/economics web site has run this article Is China headed toward collapse? that challenges the conventional wisdom on China's economic outlook.

First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.” Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.

Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.

I have also read that China has built countless condo complexes in their large cities employing thousands of construction workers and involving hundreds of suppliers only to have them sit empty when finished - primarily because Chines citizens can't afford them. Over capacity in housing and manufacturing creates a shaky economic outlook.

With the U.S. consumer joining the Japanese consumer as savers instead of spenders where will all these Chinese-made goods go if the Chinese don't start to become consumers themselves? Personally I don't doubt the American government will make all the wrong moves in regards to throwing it all in with the Chinese - as long it helps the short term view. With all the talk of one big globalized marketplace where everyone dances in concert America would be unwise to trust China or for that matter the Japanese who are in bed snuggling even closer to the communists than anyone else.

The truth is a China crash is not good for anyone really. The China boosters like economist Mike Norman and NYT writer Thomas Freidman can gush about how China is doing everything right while the Americans fiddle, but smart, serious people like Jim Chanos, a billionaire and founder of the investment firm Kynikos Associates, Gordon Chang as well as Al Fin believe otherwise - or are at least highly skeptical of China's "dominant" future.

The question is when will China falter? The compression of growth to dominance to decline is sped up by modern technology. Britain is still in a slow decline from a dominance that ended 60 years ago. The U.S. having been far more dynamic is declining even slower, but if one looks at the Japanese ascent to dominance and decline it has happened in the course of the same 60 years. China could be entering decline after only 30 or 40 years...

I have little faith that the Obama administration, who is in the finishing stages of dismantling the most dynamic economic system the world has ever seen will do anything to arrest the slide toward global economic collapse led by the U.S./Japanese/Chinese decline.