

China - The Mother Of All Grey Swans - gamble
http://dl.dropbox.com/u/6010227/Webshare/China%20Japan%20Presentation%20v3%20-%20By%20Vitaliy%20Katsenelson.pdf

======
fhe
(disclaimer: I am Chinese; living in Beijing). Since this presentation made it
to the front page of HN, I was curious to take a look. I rarely found similar
presentations (by consulting/investment firms) having a clarifying effect on
my thinking. They show an impressive array of facts and arguments, but often
after reading it I fail to be able to summarize the main ideas in a couple of
sentences (the way I often can, say, after reading a paul graham essay).

to begin with, why "grey swan"? no doubt, it's a reference to Taleb's book.
but what exactly do they mean? that what's happening in China is not
completely foreseeable, but more foreseeable than the blackest of black swans?

let's simplify things -- if we define growth as growth in wealth, and examine
if the chinese are able to pull off creating something like 10% more wealth
every year than we did last year. there are two variables to this: how many
people are working this year than last, and how productive are they.

I don't have time to research on this, but I am guessing workforce size
reduction if it happens is going to be more than offset by China simply
copying mature technologies from the West and increase the productivity of its
people, as it has been doing. the wild card is projects like centrally planned
bridge to no where, which looks productive but doesn't actually create things
people want, i.e. wealth. But China has always (i.e. last 60 years) been a
centrally planned economy, assuming the leadership doesn't all of a sudden get
a lot more stupid, and given that the portion of the economy that's centrally
planned is shrinking every year, I think one can even make an argument of
putting on a few basis points of growth simply from the gov't playing a
smaller role in the economy than before. (now of course the big stimulus
package might completely skew the balance for these couple of years, but it's
temporary noise that probably wouldn't reverse the trend.)

and argument of how big a village needs to be before it can be called a town
is irrelevant.

~~~
roel_v
"and argument of how big a village needs to be before it can be called a town
is irrelevant."

No it's not when the argument for continued economic growth is that that
growth will be driven by further urbanization. If the country is _already_
much more urbanized than is held, it becomes relevant.

(I'm not saying this argument is true or not, I don't know; someone about
brought up a good point of much smaller plot sizes in rural areas. Either way,
it's valid to question the assumptions of the mainstream claims that China's
growth will continue as it has in the past).

"and given that the portion of the economy that's centrally planned is
shrinking every year, I think one can even make an argument of putting on a
few basis points of growth simply from the gov't playing a smaller role in the
economy than before."

That's not what I understand from observers and commentators. What I
hear/read, _guo jin, min tui_ (the state advances, the private sector
retreats) is the current trend, and Chinese central leaderships wants to
weather the crisis with _more_ central control (as they need to, in order to
be able to direct banks to loan out money, set growth targets for SOE's etc.)
I'm interested to hear about your point of view as a local though, do you feel
the grip of the state on the economic is loosening?

------
quant18
Many of these arguments strike me as particularly weak, none more so than
slide 36, where he claims that China's urbanisation rate is being understated
because they have a much higher population density threshold for what
qualifies as a "city". He seems unaware that average farm size in China is
absolutely tiny compared to America --- I've seen figures as low as 0.04
hectares (400 m2!) for Guangdong [1], which is how the province as a whole
manages to achieve an Israeli-level population density of 486 persons/km2. For
the whole of China, something like 0.2 hectares seems more reasonable.

But even then, if you take the definition he suggests for a "city" (400
persons/km2), every single farming village in China would qualify. _That's_
why China has a much higher population density threshold for defining urban
counties.

[1] e.g.
[http://www.agecon.ucdavis.edu/extension/update/articles/v9n1...](http://www.agecon.ucdavis.edu/extension/update/articles/v9n1_4.pdf)
<http://econpapers.repec.org/paper/agsaaea05/19565.htm>

~~~
ximeng
This is the same guy making the same arguments as he's made on several
occasions. See here - the same mall example, same ghost city example, same
starbucks example. He's like a stuck record.

<http://news.ycombinator.com/item?id=1199422>

~~~
roel_v
Well here's a respectable (Western) (I don't imply that 'Western' mean
'respectable', just giving details) professor at Tsinghua, who regularly
appears on CCTV on economic issues, who's been making the same claims for a
while now, albeit in less dramatic terms: <http://chovanec.wordpress.com/> ..

------
d_r
_Not a touchy-feely democracy, it can build bridges, highways, skyscrapers a
lot faster with less paperwork and fewer property rights considerations._

I have been visiting China frequently in the past years. Economic aspects
aside, I still find the functional high-speed trains and rise of stunning
skyscrapers simply fascinating. Perhaps the engineer in me admires it.

Here in Palo Alto, it took the bickering of multiple committees 6 years to
decide what to build on a dilapidated, abandoned parking lot. And in the
downtown, it has taken nearly 4 years to build a short structure that now also
sits empty. And high-speed rail? Forget about it.

~~~
garply
There used to be a bar street I frequented here in Beijing. It was kind of a
sketchy place, but popular among college students and young adults. Then the
Olympics came around and the gov't decided they needed to gentrify the area.
The police raided the bars, killed a bunch of drug dealers and made other
undesirables disappear. Then the bar street was totally bulldozed and within a
year or so a luxury outdoor mall was built on top of the bulldozed area. A
thriving Apple store and Starbucks now sit smack in the middle of the place.

Within a couple of years the old sleazy alleyways were transformed into
something that could easily compete with the Stanford shopping mall.

~~~
roel_v
That's basically how Pudong in Shanghai was build. Over 20 years they turned a
backward nick in the river from slums into China's jewel for displaying to the
world. One day the bulldozers showed up, leveled the area and started
building. It's efficient, yes. There's more to a society than 'efficiency'
though.

------
jakarta
I think the best way to play the China bubble is to go after luxury retailers
in the country. For example, I found one company that you can short which
basically imports Swiss watches that they then try to resell. Property brokers
like E-House might be good shorts too, although they have secular growth since
they are taking out mom & pop operators.

I used to think that using Australia as a proxy, such as the AUD or some of
the commodity miners would work as a means of shorting China but I'm less
enthusiastic now. While there may not be demand for some of the luxury
developments, there is probably adequate demand for lower level buildings.

I imagine that the state owned enterprises would shift their construction
projects from luxury developments to critical/needed buildings and
infrastructure, potentially keeping commodity demand stable.

------
meric
USA grew prosperously for the past 100 years on the back of consumer demand of
a mere 200-300 million people. I still fail to see why China cannot do the
same with a population of 1200 million.

Yes, there will probably be a recession or even a depression here and there,
but in only a few decades time China will be much richer. The article is only
a short term view, it doesn't address what China will become in 10, 20, 30
years time.

There is of course the one child policy that might negatively affect China's
economy in the future. China's government is no democracy, and I don't see any
reason why it wouldn't simply kill the law when it becomes advantageous to do
so. After all, growth at any cost!

EDIT: Would like explanation of downvotes.

~~~
gloob
Compare Canada's population to Indonesia's. Now compare their standards of
living.

High population does not imply or cause high wealth.

~~~
meric
Correct, I did not say that high population causes high wealth.

What is behind my reasoning is that the lower the standard of living, the more
opportunity for economic growth. China's living standard is very low, compared
to the US, therefore over the next few decades, because per capita it will
still not be as wealthy as the US, it will continue to grow and become much
richer than it currently is.

A quick google search reveals that this is indeed true for Canada and
Indonesia. Indonesia GDP growth, ~2-3% per annum.
[http://www.tradingeconomics.com/Economics/GDP-
Growth.aspx?Sy...](http://www.tradingeconomics.com/Economics/GDP-
Growth.aspx?Symbol=IDR) Canada GDP growth, ~0-2% per annum.
[http://www.tradingeconomics.com/Economics/GDP-
Growth.aspx?Sy...](http://www.tradingeconomics.com/Economics/GDP-
Growth.aspx?Symbol=CAD)

Moreover, many say (including the author of the article), that because China's
growth for the past 30 years has relied on exports and now that developed
consumer countries like the US, Canada and Japan can no longer consume as
much, China's growth opportunities become further restricted.

I do not believe this is the case and here is what I was really trying to say
in my previous comment. China has 1200 million people and I believe that over
the next few decades China will be able to grow, _precisely_ because its
consumer demand will grow, too. After all, US did it with only 200-300 million
people, why can China not do it, too?

The fact that its government maybe inefficient is only a small effect on the
scale of growth we are talking about. From wikipedia, China gdp per capita is
~6600 and US's is ~46000. Even if an inefficient government like China's
reduces the potential productivity of the average citizen by three or four or
even five times, China still has a lot of room to grow.

For more information, look at the Solow-Swan Model.
<http://en.wikipedia.org/wiki/Exogenous_growth_model>

EDIT: The article talks about previous bubbles like Japan's. Yes, Japan was a
bubble, but China isn't; At least not yet. I believe Japan's economic growth
stalled because it's GDP per capital _caught up_ with the most industrialised
countries. This has not happened in China, yet, and when it does, my
prediction will be fulfilled.

Converging economies leading to equality, all powered by the capitalist
machine that is the global economy.

