Myriad Questions for the Future of China's Economy

Boom or bust? Rich or poor? Communist or capitalist? Hyperbole or reality?

Before we came to China, we had a million questions. Now that we’ve been here for a few days, we have at least a million more. Almost everyone we talk to here seems to agree that China is in a bubble. Almost no one agrees on the details. Will it end with a bang, or a whimper; a hiss or a yelp? And what should – or shouldn’t – the government do to induce a soft landing, if it is even capable of doing so? Everyone has an opinion, but they can’t all be right.

“I think the Chinese government will, ultimately, do what is best for China,” announced a friend over dinner last night, in response to a query about international political pressure on China. (Renminbi revaluation was the topic of discussion.)

“I’m not quite sure they even know what’s best,” remarked another fellow, who also lives here in China, “never mind the measures that need to be undertaken to get there.”

The second gentleman then prescribed, in very clear, reasonable, mathematical terms, what he believed to be the correct course of central planner intervention. The explanation seemed logical, from what we could make out, but, looking around this bustling city of 16 million souls, the landscape seems anything but logical. To our mind, there are simply too many moving parts for a committee to account for. People don’t act like bricks or concrete columns. They don’t always fit together perfectly or fall precisely into place. So, how does a board of planners set quotas and caps for 1.3 billion individual lives, each of which act partly on quantifiable trends, but mostly on emotional whim and unknowable motives? Nobody has ever been able to figure it out, though not from lack of trying.

The real estate market, as most here seem to agree, is almost definitely going through some kind of bubble phase. Prices in many major cities have more or less doubled in the last year alone. In Hainan Province, a resort-style island off China’s southern coast, real estate projects have quadrupled in price over the last decade. Many are those who say, “too much, too quickly.” Jim Chanos, for one, says the whole Chinese economy is like “Dubai times a thousand.” Certainly, driving around the streets of Beijing, it is not difficult to draw some parallels. There are open construction pits aplenty and cranes mottle the hazy horizon. Shiny new buildings with fancy designs and fancier price tags line the streets. Parts of the CBD area somewhat resemble Sheik Zayed Road, only the sidewalks here are thronged by workers imported from the provinces, rather than from India and Bangladesh. And, importantly, these “domestic labor imports” are able to buy land…but probably not at current prices.

The residential real estate market, the general consensus seems to agree, is particularly worrying. The numbers cooled off a little last month, but some suggest that’s only because the government requested that certain high-end properties be held back from the market. One fellow told us that the Chinese people, many of whom are coming into money for the first time in their lives, see property as a store of wealth. In most cases, second and third properties are not even rented out. Putting them “to work” is seen as similar to driving a brand new car off the lot. They want these houses empty and in pristine condition.

“People’s choices are rather limited,” he told us. “They can invest in the stock market…but they’ve seen that prices there can go up AND down. They can keep their money in the bank, but that pays a small rate of interest…and inflation is a problem here, too.

“Alternatively,” he continued, “they can invest in real assets. Many choose to buy gold or real estate. And, now that real estate is proving that it, too, can go down, people are turning to gold again.”

We got a glimpse at the retail gold market here for ourselves yesterday. The multi-story venue was positively teeming with customers – some young, some old…almost all of them Chinese. The first two floors sell everything from 50 ounce gold bars (and probably higher) to ornately decorated dragon and tiger statues made entirely from the yellow metal. The aisles were packed, elbow-to-elbow. The third floor looks more like what you’d expect to find in a typical, western-style mall. They have designer bags and clothing, make-up and other Saks Fifth Avenue-like consumer items. In stark contrast to the lower levels, that floor was almost entirely empty.

At the back of the second floor there is an exchange desk, where people buy and sell their metal beneath a display board, which shows the going price in Renminbi per gram. After a few quick back-of-the-envelope sums, we decided to buy a small amount for our own stash. Unfortunately, we learned that foreign credit cards are not accepted.

Addison, who, along with Chris Mayer and Bill Bonner, is also here in Beijing, relayed the event in yesterday’s issue of The 5-Minute Forecast:

“We asked if they took AMEX – none of our crew had thousands of dollars in the local currency. Nor did we have a local bank account, although those are apparently easy to get.

“‘We don’t accept any foreign credit cards,’ came the reply.

“‘Why not?’ we asked a manager.

“‘No reason.’”

Makes sense to us. After all, a paper I.O.U. is bad enough…but plastic promises to deliver paper promises is, apparently, a step too far.

We see enough high-end retailers around the city center to suppose there must be SOME demand for these consumer products…but it ain’t nuthin like what’s going on over at the retail gold market. It’s probably not a bad idea to own what the Chinese middle class want and, what they seem to want now is gold…not the flimsy credit cards and combustible currencies of the west.

Joel Bowman
for The Daily Reckoning