The China Investment Bubble
I'm sticking with the China news theme this week, while Obama meets in Shanghai (上海) with Chinese students.
I think this trip to China is a momentous politcal and economic moment. The United States is becoming more politically cautious in how we deal with China - not meeting with the Tibetan leader before China, soft statements on human rights, saying that the US encourages Chinese growth and will not move to contain, and making statements like: “My administration fully supports a one-China policy, as reflected in the three joint communiqués that date back several decades, in terms of our relations with Taiwan as well as our relations with the People’s Republic of China,” he said (
Why are we doing this? It is not because China has its hands around our throats and we are doing everything possible to maintain good credit. That is a myth. At this point, we are simply playing better foreign diplomacy, and this meeting with China will likely be the first in a discussion that leads towards revaluation of the Chinese currency versus the dollar, possibly by a large percent (20-30% over a year).
At this point, such a move is beneficial to the economic recoveries of both nations. Our exports become more favourable, and jobs in the US return. We need to have a rebirth in the manufacturing sector, as we are currently running the highest longterm unemployment (not just total, but the worse situation where people are out of the job markets for very extended time such as 18 months or 2 years). As
Niall Ferguson wrote in todays NYTIMES, China is basically exporting unemployment to the US in exchange for outsized GDP growth. Their stimulus and free-lending is quickly leading to a bubble state in China, with prices for real estate in Hong Kong going through the roof, and large building projects being conducted without demand for the buildings.
The article I read today that is the best analysis is from the UK Telegraph, written by
Ambrose Evans-Prichard , entitled "China has now become the biggest risk to the world economy". I highly recommend this piece. One excerpt from it that I thought was worth noting was this:
President Obama said before going to China this week that Asia can no longer live by shipping goods to Americans already in debt to their ears. "We have reached one of those rare inflection points in history where we have the opportunity to take a different path," he said. Failure to take that path will "put enormous strains" on America's ties to China. Is that a threat?
It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.
If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots. Mr Hu sounded conciliatory last week. China is taking "vigorous" steps to cut reliance on exports, still 39pc of GDP. "We want to increase people's ability to spend," he said.
The media has been writing stories about China calling for a new world currency to replace the dollar. It has also been playing up US debt levels to China, and suggesting that we are in a state leading to collapse. These kinds of stories are akin to the spring speculation of the US nationalizing all its banks. In other words, unfounded speculation - that can have the useful function of moving the equity or currency markets. Right now this fear-mongering is being seen in what I believe is a gold price bubble, which will begin to deflate within 6 months. These fears also stoke the belief that the US as an economy is on a further downward spiral - which is another poor belief to hold for an investor IMHO.
What I am thinking is more and more likely is that China and the US agree to change their currency relationship. China needs to slow its growth before it leads to a second world market crash, the US and China need to change their economic trade relationship, and China could benefit from having a stronger currency as it further persues materials and food imports from countries such as Australia or Peru.
Since I plan on traveling to China in about a year, I'm beginning to wonder whether to exchange dollars for renmingbe now, and try to make a gamble that there is another revaluation of Chinese currency within the next year.
Here is a story on the city of Ordos in Mongolia. This is becoming one of the pieces of evidence of China overbuilding. Kinda reminds me of when there was just crazy building in the US out in Arizona and Nevada just because of the ability to get credit and cheap mortgages.