
Investors Are in Denial About China - tokenadult
http://www.bloombergview.com/articles/2016-03-28/investors-are-in-denial-about-china
======
chvid
I think this is a reasonable article about China.

When people think about China they tent to assume that China is somewhat
similar to a western country going thru the afterwards of some sort of
overheated boom. Say the US from 2002 to 2007 and the big recession of
2008-2010.

But China is not mature and developed like the west.

Sure the east coast has nice modern cities which look like the cities of any
Western country. But large parts of the country are still poor, rural and
remote. When construction goes on here, a modern road is built where there was
nothing before cutting the transport time between two cities from 5-10 hours
to 1 hour. Houses are built for people to work in the city doing high-
productive factory jobs where they before were doing small-time farming in the
country side.

This is a massive lift in real economic activity which can finance a lot of
debt.

Completely incomparable to the expansion of credit to low-income families to
finance housing that gave the boom in the US and other western countries from
2002 to 2007.

Secondly there is a now huge upper middle class who are travelling the world,
sending their kids to Australia or US for study and still buying Apple
products. They are not going away. And ultimately they will change China into
something more driven-by-internal-demand, civic, modern ... even democratic.

~~~
Spooky23
I think the tinder that fuels China "bears" is the pretty obvious capital
flight from China to basically any hard asset. In the backwater city where I
live, Chinese investment funds are buying mid rise, 80% vacant mid-rise office
towers with cash in small cities.

We've seen this movie before... Back in the 80s it was called "Japan".
Everyone was making money, Japanese investors were spending billions on real
estate, brands, etc. The ending didn't go so well.

~~~
delecti
When the 80s ended I was 2. What happened when that ended with Japan?

I'm genuinely not being sarcastic, I wouldn't have the faintest idea where to
start looking for an answer to that question otherwise.

~~~
krrrh
This is a good start:

[https://en.m.wikipedia.org/wiki/Lost_Decade_(Japan)](https://en.m.wikipedia.org/wiki/Lost_Decade_\(Japan\))

It's also interesting to review old films and media from the late eighties
(Gung Ho, and Die Hard). It's hard to comprehend if you didn't live through
it, but there was a massive level of anxiety in the US that Japanese business
culture and management prowess was going to be impossible for the US to
overcome, and that th US was in decline.

The Asset bubble in Japan was so insane that at one point the nominal value of
the Imperial Palace was equal to the value of all property in the state of
California. Aother good Wikipedia article to read is this one:

[https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble](https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble)

~~~
hkmurakami
I think we can say that the "lost decade" has extended itself to a "lost 25
years"

~~~
exwardna
If the "lost" decade refers to the sluggish growth of Japan starting beginning
of the century, let's not forget that Japanese population growth has been
negative for a while. The per capita economic performance of the country is
much less lost in that regard.

~~~
hkmurakami
fwiw it started in the 90's.

------
dforrestwilson
[http://www.nytimes.com/2016/04/03/magazine/the-fall-of-
china...](http://www.nytimes.com/2016/04/03/magazine/the-fall-of-chinas-hedge-
fund-king.html)

Another illustrative story of the forces at work in a semi-translucent
economy.

------
devy
Author is an associate professor at Peking University HSBC Business school.
[1]

[1]
[http://english.phbs.pku.edu.cn/index.php?m=content&c=index&a...](http://english.phbs.pku.edu.cn/index.php?m=content&c=index&a=show&catid=627&id=1)

------
sbt
This has been the consensus view for at least a few years now. Consequently,
there has been a large fall in prices for companies benefiting from China,
from miners to European tailors. I don't know if economists are in denial, but
if anything asset markets still reflect a deep worry about China.

I would rather worry about the flipside scenario, that China is in better
shape than most Western analysts fear.

------
mvc
Seems like a good time for Western governments to invest in infrastructure
then. Every cloud...

------
jldugger
There's obvious buildup in China with bubble-like properties. But on the other
hand, continuing the policy of relaxing Hukou might offset that.

------
sharetea
The article talks about investors needing to know that

1.) China's construction boom is over

2.) Need to understand China better

3.) Take off the rose-tinted glass

I would add a few more here:

4.) With all the capital controls currently in place, once you invest, you
might not get your money out, ever.

5.) With president Xi becoming more dictator-like, and encouraging anti-
foreign behaviors, once you get in to China, you might easily get in trouble.
Jailed without trial. Or disappeared.

6.) With the great firewall becoming more restrictive, and VPN working less
and less, you might not be able to hit any foreign websites from China. No
communications with your family or loved ones. No search for foreign
customers.

7.) With the impending yuan devaluation (20%-50%), it might not be worth it
with a low growth environment in China.

~~~
mastazi
Points 4-6 (financial freedom, rule of law and freedom of communication) are
all long-standing problems in China, and personally I believe that, if not
fixed, they will prevent China from becoming, in the long run, a developed
economy. However I don't have evidence that the situation is now getting worse
in relation to these specific 3 points. I would be interested in reading
reliable sources related to the above.

~~~
kristofferR
5: [https://www.washingtonpost.com/world/asia_pacific/is-
china-h...](https://www.washingtonpost.com/world/asia_pacific/is-china-
heading-in-the-wrong-direction-for-once-the-west-calls-beijing-
out/2016/03/22/c4cad76e-eacb-11e5-a9ce-681055c7a05f_story.html?tid=a_inl)

5:
[https://www.washingtonpost.com/world/asia_pacific/pursuing-c...](https://www.washingtonpost.com/world/asia_pacific/pursuing-
critics-china-reaches-across-borders-and-nobody-is-stopping-
it/2016/01/26/cd4959dc-6793-473f-8b74-6cbac3f46422_story.html)

6: [http://www.wsj.com/articles/china-seeks-more-legal-muscle-
to...](http://www.wsj.com/articles/china-seeks-more-legal-muscle-to-block-
foreign-websites-1459230128)

~~~
mastazi
Thanks. I'd like to add this one, which came out with today's edition of The
Economist.The Economist | Chinese politics: Beware the cult of Xi
[http://www.economist.com/news/leaders/21695881-xi-jinping-
st...](http://www.economist.com/news/leaders/21695881-xi-jinping-stronger-his-
predecessors-his-power-damaging-country-beware-cult?frsc=dg%7Cd)

------
sharetea
> This is a massive lift in real economic activity which can finance a lot of
> debt.

China's already hit its limit. "Also, the Chinese economy is over-indebted.
The total social debt is now 300%. Together with external debt, this figure
rises to about 350%." [http://marketrealist.com/2016/01/george-soros-sees-
crisis-re...](http://marketrealist.com/2016/01/george-soros-sees-crisis-
reminiscent-2008-time-china/)

> Secondly there is a now huge upper middle class who are travelling the
> world, sending their kids to Australia or US for study and still buying
> Apple products. They are not going away

"their buying power doesn't compare with that of their US counterparts.
Between 2010 and 2014, only 12% of these people reported a household income of
more than $3,200 a year, or $8.50 a day."
[http://www.businessinsider.com/demand-report-on-chinas-
middl...](http://www.businessinsider.com/demand-report-on-chinas-middle-
class-2015-11)

~~~
chvid
> China's already hit its limit. "Also, the Chinese economy is over-indebted.
> The total social debt is now 300%. Together with external debt, this figure
> rises to about 350%." [http://marketrealist.com/2016/01/george-soros-sees-
> crisis-re...](http://marketrealist.com/2016/01/george-soros-sees-crisis-
> re..).

There is good and there is bad debt/investment.

If debt is used to finance productive investments then a high debt to GDP
multiple is not a problem, it is in fact a sign of health.

Secondly if GDP growth is high and interest rates are lower then debt is much
less of a problem in general.

> "their buying power doesn't compare with that of their US counterparts.
> Between 2010 and 2014, only 12% of these people reported a household income
> of more than $3,200 a year, or $8.50 a day."
> [http://www.businessinsider.com/demand-report-on-chinas-
> middl...](http://www.businessinsider.com/demand-report-on-chinas-middl..).

These numbers are off by a factor of 10.

\---

Of course the future is anyone's guess. Personally I think China is going to
continue growing at a high pace until its GDP pr. capita matches Taiwan, South
Korea or Japan.

~~~
adventured
> There is good and there is bad debt/investment. If debt is used to finance
> productive investments then a high debt to GDP multiple is not a problem, it
> is in fact a sign of health.

We already have the answer on that one, and have for a long time. The return
on debt - the growth derived from taking on increasing amounts of debt - for
China has plunged the last ten years. At this point, taking on more debt
accomplishes absolutely nothing in regards to growth. They've saturated their
ability to grow using those methods.

Their GDP per capita can never match the equivalent of Japan today. That's
implying a Chinese economy that is nearly the size of the entire global
economy today. That's the same kind of hype and absurdity the article is
talking about. Where is the next $40 trillion in GDP going to come from?
They're struggling to grow their economy at all today (and yes, the 6.x%
figure is pure fiction), while taking on tens of trillions in new debt. If
they can't grow their economy today, with that much debt financing, when will
they be able to? The answer is: the party is long over, the only thing left
now are consequences to all the bad choices that led to China becoming the
world's most indebted nation in record time.

> These numbers are off by a factor of 10.

Support your position then.

~~~
chvid
> That's implying a Chinese economy that is nearly the size of the entire
> global economy today.

Yes.

> Support your position then.

The Business Insider article mistankenly says pr. year where it should have
said pr. month.

Sharetea must have somehow stumbled on this as he introduces a "." in the
quote so 85 USD becomes 8.50 USD.

The correct numbers are in the report:

[http://demandinstitute.org/demandwp/wp-
content/uploads/2015/...](http://demandinstitute.org/demandwp/wp-
content/uploads/2015/11/TDI-No-More-Tiers.pdf)

"Only 12% reported monthly household income of more than 20,000 yuan ($3,200),
or $85 a day."

Where group that is referred to is the group of "connected consumers". The
group is 368 mio. Chinese pt.

------
anon987
Investing in China? Sounds on-topic for HN to me.

------
intrasight
Capital flees because capital is a perfectly rational meta-being. If capital
is fleeing, it is for good and rational reasons. "Irrational exuberance" \-
sorry, there's no such thing. Capital works with the information it has at the
time it makes decisions. "Risk of a correction" \- sorry, but I see no mention
of risk when I lookup "correction" in the dictionary. When capital updates its
model with new information, there will be losers and winners. Finance is about
having a better model and better information.

~~~
emodendroket
"Irrational exuberance" was coined, or at least popularized, by free market
true believer Alan Greenspan in a speech to the American Enterprise Institute.

~~~
intrasight
Yes. And it's sad that he is mostly remembered for a term which is effectively
anti-market

~~~
emodendroket
That is certainly not what he is "mostly remembered" for, and I suspect the
popularity of the term is precisely because that is not the case.

------
duncan_bayne
Of course, the Keynesian policies that have failed China will also fail the US
and the EU.

I do wonder how many times the Austrian school will be proved right before the
public start to notice.

~~~
samastur
It would help if it was proved right at least once :P

~~~
duncan_bayne
The failures occurring in China right now, as noted by Bloomberg, are exactly
the failures that the Austrian school predicts will occur in the US and EU.

