The China Bubble - You want fortune cookie?
Ok I thought I'd give my 2 cents about China. I think it's a bubble economy that's getting close to popping.
OK, a big deal was made about how China has secretly been stockpiling Gold for the last few years. I'm not really concerned that they did, but I was definately concerned that they they could without us noticing. I'm fully aware that they have Gold mines in China, but we would have noticed an output drop even if they siphoned off a fraction of what they stockpiled. They could have discovered new mines that they didn't tell us about, but that would require years of planning, and quite frankly China economists are not what I would call patient. It took me a while to figure out how they were getting it, but I finally read 1 line in a commodities book and figured it out. How did they get it? Believe it or not you and I threw it a way!
The line I read was "There is more gold in a ton of computer waste than there is in a ton of gold ore." The reason that the book says it isn't as cost efective to reclaim the gold in computers, is because it's very time consuming and labor intensive. Well when you throw a computer away, guess where it usually winds up? And guess which country has an endless supply of cheap labor? I find it funny that another country is getting wealthier on our garbage.
Ok, now to suppress your fear about China adopting the Gold Standard. They can't! No matter how much they want to. Why? Because if they did that, they could no longer keep the yaun artificially lower. Think about it! What would keep you or I from selling gold for yuan and converting yaun to the dollar over and over again? They would have to decouple from the dollar to go to the Gold Standard and that would be their downfall. For those of you saying that they will move to a basket of currencies rather than the Gold Standard, What currencies? Most other currencies are in worse shape than ours!. Sadly I think the yaun is tied to the dollar for quite a while.
Why would inflation be such a bad thing for China? The Chinese middle class currently live on about $5,000 a year. Low by our standards, but in yuan, a family can live comfortably enough to have about all the necessities that we enjoy and a lot of the luxuries as well. (That wage is enough for a family to hire domestic help) China now has a 3 headed monster! First, the current Middle Class has tentively supported the government, but expects their standard of living to keep increasing at the same pace. China's continued growth depends on Chinese farmers to continue to migrate to urban areas, but farmers have seen an increase to their income at a pace that's better than the migrant workers and they are less likely to migrate. Any increase in pay for migrant workers creates more inflation and lowers the standard of living for the middle class. Also Chinese companies operate on such tight margins, that any increase in labor costs, can price them out of the world market. A natural progression would be for China to compete in the services industry, and in technology, but China did not invest in training in those industries like India did.
On to why the bubble will burst! The real interest rate! The real interest rate is the current interest rate minus inflation. China reports inflation at about 6%. A lot of experts say that it's at least 10%, but we'll go with their numbers. China has kept the rate to borrow money at about 3% for quite a long time, but I'm sure they lowered that rate when we did, We lowered ours to practically 0%, and to keep pace China would have to lower theirs to effectively -3% (they couldn't really do that, but 0% is almost a given), again that's if the numbers they were reporting are true, but to be conservative I'll go with the 3% and pretend they didn't lower it. Even in this weak economy most experts will tell you that China is still growing at 7-9%. So for the average middle class China-man, It makes sense to borrow as much money as you can, and invest it all in the stock market. Do you remember from a few years ago that the Chinese Government was trying to stop that very thing? There is even more incentive to do it now than before. Picture your parents or grandparents borrowing everything they can and investing it in the market. How do you think that would turn out? Buying too much US debt! Let's face it, we have written too many checks that we can't cash. Given a (in my opinion) inevitable global depression, we are gonna have to at least partially renounce our debt. Are we gonna renounce the debt to our own pension plans, or are we gonna renounce the debt in foreign hands? China's stock-piled commodities! This one gets to me the most! If you think that gold is the only thing China stock-piled your mistaken! In fact, they are stock-piling everything! They currently produce 4 times more steel than they use, and 1/3 of their steel production is to fabricate more plants to make more steel! In a Global depression, they are gonna be forced to sell those commodities at a huge loss! Given all the other problems that sprout up, they will be lucky if the current government is in control long enough to sell them. They are in the same boat Japan was 30 years ago. They tried to grow too fast and were willing to manipulate their own economy to do it, and just like Japan, the economy will fight back.
In case any of you want to dismiss me as another raving bear, take a look at my Caps portfolio. I have about 5 or 6 red thumbs. I have about 190 Green thumbs. Don't get me wrong, I'm very pessimistic, but I rightly predicted a bear market rally and I'm taking advantage of a good guess. I was originally loooking at October, as the market correction, but more and more i think that June might be a better estimate.
For my last statement, I'm sure a lot of you are thinking, that if China loses, we win. Not a chance! We've suffered poor government policy too long to recover. We are Britain 100 years ago! There will be a new economic power that takes over. My bet is that it's India, but I'm not close to being sure. We can rebound quickly if our government responds quickly, and I think the best reponse is if we adapted the Gold Standard ourselves. Time will tell.