Is the Chinese Economy the Atlas of Global Growth?

Dow down 130 yesterday. Oil below $100. Gold lost ground too – and now sits right on the $1,500 line.

What’s going on?

We don’t know. But the markets are acting like there’s something on their minds.

What could it be? QE2 coming to an end? Greece going broke? Housing in a double-dip? Stocks over-priced in a Great Correction?

Who knows? Who cares? The markets can always find something to get spooked about. That’s why you don’t want to buy when prices are high. Something will always come along to bring them down. Gravity works.

Since we’re here in Beijing, let’s take a look at the situation here.

No Great Correction in China. Instead, the economy is booming. But prices are rising, threatening China’s economy…and not doing any favors to the US either.

HONG KONG (MarketWatch) – Chinese economic data released Wednesday showed consumer inflation moderated slightly in April, though remaining at elevated levels, while industrial output was weaker than forecast, amounting to a mixed picture and spurring concerns of a deepening slowdown.

China’s consumer-price index climbed 5.3% in April from a year earlier, while wholesale inflation climbed 6.8%. The results compared to analysts’ expectations for rises of 5.2% for the CPI and 7.3% for producer prices, according to a poll by Dow Jones Newswires.

But if you want to buy something…steel, TVs or shoes…China is the place where they are all made.

“It’s amazing,” said Jules, fresh from a shopping trip in Beijing. “They have this whole area where you can get anything. Shoes. Shirts. Watches. Sunglasses.

“You can get any brand you want. Armani. Ray-Ban. Chuck Taylor’s. Dolce and Gabana.

“And it’s all cheap. You have to bargain with them. But you can get things much cheaper than anywhere else in the world.

“Of course, they’re all fakes. They’re all knock-offs. You know, in New York there’s a guy name Tom who took the Argentine espadrille (a cheap shoe) and turned it into a fashion item. He even put the Argentine flag on it. Espadrilles sell for about $2 in Argentina. But you can get a pair of Tom’s for about $50. And for every pair you buy, Tom says he gives a pair to a poor kid. I don’t know what makes Tom think that poor kids want his twitty New York designer shoes, but that’s his angle. He even has vegan shoes… I guess they’re not made with any leather parts.

“Here in China there are people even knocking off Tom’s knock-offs. Tom probably has them made here anyway. You have to haggle, but you can get them for about $15 – still more than the espadrilles that Tom was knocking off in the first place. But I don’t think these merchants give a pair to poor people. Instead, they make a profit. And then there aren’t so many poor people.”

Last evening, we hosted a cocktail party for a small group of our dear readers, here in Beijing. As expected, our readers in China are adventuresome and smart. We asked what was going on here.

“China still has plenty of poor people,” explained a dear reader originally from Philadelphia. Hundreds of millions of them. And in order to keep absorbing them into the modern economy, China has to continue to grow at 6% per year. If it doesn’t you could get some serious social unrest. Maybe a revolution.

“Now, China is growing at 9% per year, so we have some margin. But there are limits. I’m worried about where they’re going to get the water. As people get richer, they use much more water. Imagine if each person in China ate just one grain of rice more per day…every day. The country couldn’t keep up with the additional water needs.

“And when people get richer they want not just more food, but better food. And as you go up the food chain, water use increases enormously. In order to produce meat you have to grow about 10 times more grain to feed animals. And then, people use more water in their homes…and gardens.

“China just doesn’t have that much water.

“It could get a lot of water from Siberia. But it’s a huge investment. And the authorities are worried about water security. If they get it from Siberia, they’re at the mercy of Russians. They don’t want Putin to be able to turn off the tap after they become dependent on it.”

There are limits to everything. There are limits to Chinese growth. Some of those limits are physical. Other limits are economic. Some are temporary setbacks. Some are permanent obstacles.

“You remember that famous line by John Connally, when he was Secretary of the Treasury?” We said that to a young reporter from Beijing’s leading newspaper. Along with Demise of the Dollar author and colleague, Addison Wiggin, we were being interviewed.

Two of our books have been translated into Chinese. We found an English version of one of them in a local bookstore. From what we heard – and allowed ourselves to believe – our predictions of the coming bankruptcy of the USA have turned us into big-name, celebrity economists in China.

On arrival, we expected the streets to be lined with adoring fans…and young women to throw their underpants at us. We were looking forward to it.

But we arrived in Beijing much as we would in Baltimore. No one noticed. And now, before us were two callow reporters who had no idea who John Connally was…and certainly had never heard the ‘it’s our dollar, but it’s your problem’ line.

We pushed on.

“The point is, the dollar is going down. Over the short term, I don’t know…but certainly over the long term. As it is, a tollbooth operator in the state of Massachusetts earns more than a person with a master’s degree in computer science in Beijing. And the fellow in Beijing works 12 hours a day…and gets almost no benefits. (This information came from our Dear Reader from Philadelphia.)

“One way or another, this isn’t going to last. In a global economy, it doesn’t make sense. Chinese salaries are likely to continue to rise. But salaries in the US are likely to remain stagnant…or even fall. And the easiest, simplest, and most likely way to lower real earnings in the US is to reduce the value of the dollar. Not only does it automatically reduce wages…it also reduces the cost of benefits.”

“But, this is not good for China,” the young man said, quickly putting two and two together. “China holds trillions of dollars.”

“That’s right. That’s what Connally was talking about. China is going to be a winner…because it’s going to get richer, in comparison to America. But the Chinese central bank – which is the largest single holder of dollars in the world – is going to lose money.

“It’s a rather classic case of ‘when you owe your bank $100,000 you can’t sleep at night. But when you owe your bank $1 million, it’s your banker who can’t sleep at night.’”

The reporter looked puzzled. He was wondering what banker would be stupid enough to lend you $1 million? Certainly, not a banker in China!

“But what can the Bank of China do?” came the follow-up question.

“All it can do is to take those dollars and buy real reserves – gold,” we suggested. “And it’s already doing that. That’s probably why the price of gold never dips as much as you expect.”

Here at The Daily Reckoning we cling to the quaint and antiquated idea that being good is better than being smart. But we live in a world in which everyone wants to be smart. The feds think they are smart enough to control an entire economy. Wall Street geniuses are so smart they think they deserve million-dollar bonuses and billion-dollar paydays. Obama and Clinton are so smart they think they know who should get the death penalty – even without a trial.

But occasionally, in a world of weeds, a wildflower buds…and blooms…if only for a few hours.

In the Great State of Virginia, for example, a group of churchmen has decided to ignore the advice of their smart lawyers and do the right thing – to tell the truth, that is. USA Today has the headline:

“Following scripture, a Virginia church rejects its insurer’s advice and apologizes for a minister’s sex abuse.”

There is, no doubt, more to the story. But we don’t care to know it. We have our heroes for the day.


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning