What is China doing, where is it going? A big question for the world.
This is long so I will put what was the ending summation right up front as well as at the end. Then what follows is my review of their 52 minute discussion.
Summation at the end of this blog post:
At 46:00 Holmes makes his summation. Optimism based on the hopes of
people, not just in China but other developing nations. He puts his
money where his mouth is and his job is to understand social, economic
and political factors and adapt to that change. He sees hope in some
countries, fear as the driving force in others, giving rise to
terrorism.
Chang sums up saying that migration of
people from China voting with their feet says something about what they
see coming. The rich want to leave. Then he extrapolates from his
lifetime world experience that saw so many counties boom create hysteria
that they would dominate but they failed, like Japan and says the laws
dictate that China will too because: "The Chinese economy will
eventually have to pay for grossly wasteful investment, runaway
corruption, a deteriorated environment, a crushing debt load." What he
sees today is the beginning of the crash. The laws say they must crash.
Bear and Bull.
I go with Holmes.
I
think that China is going to play their game by different rules making
them and their currency the center of the economic world.
This Cambridge House International sponsored discussion presents a Bear vs Bull view of China.
Founded in 1995 Cambridge House International Inc. has grown to be the
world leader in producing resource investment conferences, specifically
in the mineral exploration sector.
Gordon Chang presents the bear position. At 6:10 he talks about China having already built all of its ghost cities and bridges to nowhere so investment cannot drive growth in the long term. China is cutting back on this investment because many of these projects are unviable. China debt to GDP ratio is at least as bad as America and probably worse. He references a Chinese economist that said of China: "Every Province is Greece".
Chang says Exports are faltering and the only thing that can drive the economy is personal consumption and China is the most unbalanced economy in the world. Consumption is less than 34% of GDP. Consumption is declining and will not grow until the government takes risky steps to change the economic model. The government "knows what to do" but nobody is willing to do it because of the political transition which will last for years. Rich insiders see what is coming, 50% want to leave the country and the rich are getting their money out.
The speaker presenting the bullish position talked about the growth of the money supply in China at 30% as well as a large economy growth rate comparing it to the growth of money supply in the USA and low economy growth rate. China injected substantially less to maintain their economy growth rate. China is making mistakes, acting to correct them (housing market) but advancing as the USA did over the past 100 years but doing it much faster. He cites 30 years the rapid growth of the past 30 years.
However, in my opinion, the recent growth curve is the most important and it curves upward more rapidly. He did not extrapolate that rate of recent growth into the future but I look at it and say it is like a rocket taking off.
The Bear, Gordon Chang, says China is going to crash. He said the same in his book 10 years ago. He admits it has not crashed yet but it will and cites some stats related to slowing of exports. Bank balance sheets are week and therefore bank investment will slow. Banks are in trouble and China does not have the flexibility to act on the problem. Inflation rates are high. Overbuilding is the problem. Unoccupied apartments. Enough for 200 million people but the government is building apartments that could house 40 to 50 million more. He asks: How many more ghosts cities can China build to keep its economy growing? They are going to crash.
The Bull, Frank Holmes says that housing is not going to cause the correction it did in the USA. 30% down is required and bank reserve rates are high. Therefore any correction entails much less unwinding than in the USA. He cites the money supply in China and the increasing turn over rate. He says (at about 22:50) 20% money supply expansion world wide is going to have effect on the commodity markets price.
At 26:00 Holmes, the bear starts to talk about protests and says something that strikes me as vitally important. The people in China are protesting corruption at the local level which is dealt with (or can be if not will be but the government want to keep people happy) by the government. We, the people are protesting Wall street corruption. That is at the top level. The government does little or nothing except some meaningless low level prosecution. Discontent at the local level caused by local level corruption gets government action in China. There is no equivalent Wall Street level in China to challenge/subvert the government. Duh! I wonder why. Perhaps a fruit of the communism? Chinese don't march on Wall Street they march on Main Street against local inequalities! Wow. What does OWS get marching locally?
At 28:00 Chang talks about the shadow banking system question he says that Holmes did not talk about. Chang talks about the 4 major private banks, I think he means the banks other than the Peoples Bank which is the government bank. He talks about their shadow banking practices. In the USA shadow banking is the domain if the entire banking system. I think that shadow banking in the 4 major banks is not a big problem in China they are only bit players in the economy dominated by the government bank. He says the shadow banking system in the private banks is going to retain liability for their shadow loans if the fail in the future! This is a problem? A fault? Wish our banks had that liability!
Chang talks about the growth in protests as well as increased violence of protest across the country. We saw it in our country. He says China government is unable to moderate the conflict throughout the country. It is a one party system. Good for China. The USA moderated the conflicts here by sending in government forces. Police and troops. Then passed laws to moderate it when police/military force against the people failed, as it should, when used to moderate violence rather than mediate it because it cannot by nature mediate only enforce the power of one side over the other. He says the communist party stays in power because of its use of coercion and only by its use of coercion. So, I ask how do our two parties stay in power? By vote of the people? Manipulation is subtle coercion. That means people are beaten but they don't realize it?
Chang says that China leadership is failing to control the violence and it will have an effect on the economy. I hope it does by the implementation of law and the enforcement of it. We implemented law to achieve equity. Then after some time failed to enforce it because government was manipulated. If China is smart they will implement law and enforce it. It is called the People's Republic of China. PRC. That is the official name of the country. The government Bank is called the People's Bank of China. It is not a private bank. Manipulation starts by calling a thing by a name something other than what it really is.
At 30:00 the role of the US Dollar as a reserve currency and China holdings of dollar as part of our national debt (that is about one trillion dollars) is addressed.
Holmes says China is dealing with Japan in Chinese currency. China is dealing with other places in the world and building up relationships with other countries in Chinese currency. Africa is cited as an important example.
Chang says that you can't have a reserve currency unless it is convertible on the world market and China is a long way from that. You have to run trade deficits to make your currency a world reserve currency and convince the rest of the world that you have a stable currency so they are willing to hold your currency in trade. China is not willing to run deficits nor make its currency convertible. If it did it has to then convince the world that it has a stable monetary policy. Until then the world is stuck with the US dollar as the reserve currency.
Holmes says that China's great internal investment in infastructure and implies, I think that because the investment is foreign there is some aspect of domestic investment that contributes to consideration of money factors other than foreign trade and deficits as a cornerstone of reserve currency. I am fuzzy on this but the concept of a reserve currency is a fuzzy thing for me as well. The choice of what country's money to use. Are we the choice because we have the biggest police force to protect it and rule by virtue of American Exceptionalism?
At 34:00 talks starts about the limitations on the China banking system in terms of inflation and money supply.
It gets hairy here. Chang says the central bank is insolvent. Holmes asks if the Federal Reserve and the EU are insolvent? Chang says it is not about the USA. Holmes says in reply that it is all about the US. Chang says that China does not have the resources it had 3 years ago to rescue their economy.
At 41:00 discussion of demographics starts. Chang talks about the economic problems of an aging population and fewer younger people as a result of the one child policy. Holmes responds that the situation is a result of the government having a heart that saw it could not feed all its people (fear of the unfed future population?) and doing something about it.
Chang says demographics is a 20 to 30 year problem. Holmes say the near term 5 year problem as it is in so many other countries, especially India that has even more young people as well as stressed countries in the EU. That problem is jobs, job creation. Chang counters with the increased number of older people that younger people will have to support in the future. Holmes responds that the situation is a result of the government having a
heart that saw it could not feed all its people (fear of the unfed
future population?) and doing something about it. Chang counters by saying how much heart did the government have when its policies resulted in abortions, choice of boys over girls? It is a human rights issue and the Chinese people hate the policy.
I think the Chinese government had a hard choice to make and made it.
What I think is not being looked at is increased productivity of each worker in the future. Maybe even now. It is like the situation we had where farmers moved to the cities. How are the remaining food producers going to support them? They bought tractors! Became more productive.
At 46:00 Holmes makes his summation. Optimism based on the hopes of people, not just in China but other developing nations. He puts his money where his mouth is and his job is to understand social, economic and political factors and adapt to that change. He sees hope in some countries, fear as the driving force in others, giving rise to terrorism.
Chang sums up saying that migration of people from China voting with their feet says something about what they see coming. The rich want to leave. Then he extrapolates from his lifetime world experience that saw so many counties boom create hysteria that they would dominate but they failed, like Japan and says the laws dictate that China will too because: "The Chinese economy will eventually have to pay for grossly wasteful investment, runaway corruption, a deteriorated environment, a crushing debt load." What he sees today is the beginning of the crash. The laws say they must crash.
Bear and Bull.
I go with Holmes.
I think that China is going to play their game by different rules making them and their currency the center of the economic world.
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