China: A Riddle Wrapped in an Enigma
Too many and too few people…too much and too little money…a history so epic many would rather forget it and a future so uncertain everyone is willing to gamble on it. One sometimes gets the feeling that China’s economy is beyond control; a behemoth, the likes of which the world has never seen, hurtling forward at an astronomical rate; unpredictable and, to the confusion and dismay of all who seek to know her, stubbornly and unapologetically elusive.
Jim Chanos, perhaps the world’s greatest short seller and the smartest guy in many a room, is bearish on the Middle Kingdom…bearish as in, “China is Dubai times 1,000, if not a million” bearish. Jim Rogers, arguably the best resource investor around is bullish…bullish as in, “China is going to be the most important country of the 21st century,” bullish.
It goes without saying that your editor is no Chanos. And he is no Rogers, either. Heck, he’s not even a Jim! To us, China is a riddle, wrapped in an enigma and encircled, as the Internet gurus inform us, by The Great Firewall of China. For many spectators like us, any world where Google is not the number one search engine might as well be another planet entirely. And yet her allure, dripping with possibilities and opportunities, is irresistible. How many western entrepreneurs have scratched their heads and thought, “If only I could convince one in a thousand people to buy my gadget…read my book…listen to my message.” In China, if you have a one-in-a-million T-shirt on, 1,300 other people are walking around in the same one.
By the middle of this decade, many already assumed that the 21st century would belong, in some way, shape or form, to the Chinese. Their population was simply too overwhelming too compete with, and too competitive to overestimate. Where the US has nine cities with a population exceeding one million, and the UK has two, China has more than 160.
Fantastic stories of megatropolis construction sites filled the world’s in-flight magazines. Twenty cities to each house twenty million people…the greatest migration of mankind ever…We watched as GDP in the Middle Kingdom ran white hot, clocking double digit growth year after year after year. Global supremacy seemed all but a mathematical inevitability. Their factories chugged away night and day as consumer economies in the west shipped boatloads of cash to China’s shores in exchange for anything and everything the people there churned out. The Chinese government was so encouraged by its people’s industry and progress they even lent westerners the money with which to buy their local knickknacks. Nobody – save, perhaps the Vietnamese and Cambodians – would work like the Chinese…and nobody would do it at such a low price. Nobody, it seemed, could match their vigor. Indeed, American consumers were so impressed by Chinese industry they mortgaged their own houses and futures to finance it.
But then the consumers got the big squeeze…in a bad way. The credit crisis hit Wall and Main Streets.
It was around that time when China’s stock market began tracking the approximate trajectory of AIG executive popularity polls. Within a year almost two thirds of the value of Shanghai’s CSI 300 Index had been wiped out. Foreign direct investment evaporated as institutional funds in far off lands repatriated allocations to cover crushing margin calls back home. Factories slowed. Many closed. Clouds over Beijing started spreading rumors about “sunshine” and “fresh air.” For the first time in a decade or more, people began to look beyond the mind-boggling figures on China’s scoreboard. Gun-shy investors grew suspicious about sustainability and capacity – specifically overcapacity.
In short, they wanted to know if China could survive with her best customer, the US, curled up in the fetal position across the Pacific. If consumers in the great consumer economy were forced to economize, what would happen to China Inc., some 70% of which relies on exports?
The problem, the experts said, was that while Americans had gorged, the Chinese had fasted. Where the west had spent, the Middle Kingdom had saved. There was a catastrophic imbalance, they said, an imbalance that threatened to spin the world off its axis and send it into outer space. And so, in the middle of the most epic, debt-fueled financial crisis in a century or more, the world pinned its hopes for recovery on the Chinese factory worker.
“Start spending!” they implored him. “Grab a credit card and start amassing some debt! If you don’t, we’re surely all doomed!”
So far, so good, according to Romeo Dator, co-manager of the China Region Fund. Dator points out that retail spending in China remains strong, up 16% in October on figures from last year. Industrial production is up by the same margin, he says, and housing starts, for the second straight month, are up 50% year over year. Dator cites domestic consumption as one of his five reasons to be bullish on China.
Puru Saxena, a regular contributor to the DR who is based in Hong Kong is also enthusiastic about China’s robust consumption. Saxena points out that 900,000 cars are sold each month there, and that, “by the end of this year, the Asian powerhouse will replace America as the world’s largest market for automobiles.” The trend is similar for other household items such as refrigerators, motorbikes and mobile phones.
Then there’s the $2.3 trillion (with a “T”) China holds in foreign reserves…the war chest of strategic resource investments it has throughout Asia, Australia, Africa, Canada and South America…strengthening trade ties with other emerging nations…a Daily Reckoning satellite office in Taipei…the list goes on…
But nothing ever moves in a straight line, dear reader – neither up nor down. China has more political headaches than a DC shrink and some 200 million of its people still exist – barely – on less than $5 per day. In many ways, it is also an environmental disaster zone with the people feeling the very real effects of their country’s rampant growth.
According to Ma Jun, director of the Beijing-based Institute of Public & Environmental Affairs and author of China’s Water Crisis, some 400 of China’s 600 cities are facing basic water shortages, including 100 that may see serious shortages. Just to meet the needs of its city dwellers, Ma estimates that the country needs another 40 billion cubic meters of water per year, or about one-tenth the volume of Lake Erie. And that’s to say nothing of the 300 million residents living in rural areas.
Indeed, these are no small problems, but neither are China’s aspirations modest in size or scope. Fortunes will be made and lost in the coming century all around the world…more so, on both counts, in China.