 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
| Questioning the "Chinese Miracle" "When anger boils up in your heart so long, it has to burst . . ." |
China's growth rate will create shortages of oil and other commodities, fueling
hurting import growth from other countries.
Some pundits worry that China will use its huge profits to buy up foreign companies.
Others worry that China will stop investing it profits in US bonds, thus driving
interest rates up, and choking off economic growth here.
There is evidence to support and defend any point of view, and I am not going to
address here any of these concerns. Rather, I want to raise a different, more
significant concern. I believe there is mounting risk that the structural flaws
in Chinese society may significantly disrupt China’s economic expansion.
While I have no ability to predict when (or if) such disruption will occur, I do believe
investors should be aware of the risk, and reflect upon the consequences such a
disruption would have on their portfolios.
Investing is primarily a process of risk management and control. The wise investor
vigilantly watches for those things that can harm a portfolio, letting the good “luck”
take care of itself. With that in mind, I am sharing here some of the evidence I have
seen to cause me to be concerned about China.
-----------------------------------------
One concern is the inefficient allocation of resources in a centrally
controlled economy:
“ ‘We are using too many raw materials to sustain this growth,’ said Pan Yue, China’
s environment minister . . . ‘To produce goods worth $10,000, for example, we need
seven times more resources than Japan, nearly six times more than the United
States and, perhaps most embarrassing, nearly three times more than India.’
“Others worry about China’s seeming addiction to large investment, which leads to
huge waste and steep cyclical downturns, a shaky financial system imperiled by a
huge burden of nonperforming loans, and rampant official corruption.” (New York
Times, April 10, 2005)
China’s economy grew by 53% between 2000 and 2004. How was this
reflected in the Chinese stock markets? . . .
“As the market plumbs six-year lows, China’s 60 million retail investors are an
embittered lot – sounding a jarring note amid the capitalist changes transforming
China’s economy. The government once touted the nation’s two stock exchanges,
started in 1990 and 1991, as founts of opportunity. But they have turned out to be
full of rotten companies that relied on political connections to get listed.
“For the ruling Communist Party, the rage of investors who have lost their nest eggs
could be toxic. The party has long struggled to keep a lid on social unrest,
especially among unemployed workers and overtaxed farmers. Now a big chunk of
the middle class is angry, too. In a recent online survey of 200,000 people by the
official Xinhau News Agency, the poor-performing stock market ranked as the
biggest concern, beating out corruption, the No. 2 worry, by a 3-to-1 margin.
“The public expressions of displeasure with the stock market . . . reflect a culture of
protesting that has grown over the past decade. The government now accepts
protests over corruption, pollution and other disputes as routine, so long as the
protesters don’t attack the core principles of Communist rule or challenge top
leaders.
“In a nation that lacks polls to measure top leaders’ approval ratings or independent
media outlets, the direction of share prices is one of the few genuine barometers of
public sentiment.” (The Wall Street Journal, April 21, 2005)
“Nearly every week, regulators announce a new initiative aimed at shoring up the
slumping market. Despite such efforts, stock prices have continued to slide. . . . the
stock market has been tumbling amid allegations of accounting fraud, poor
corporate governance and continued government interference in business
operations.” (New York Times, June 15, 2005)
Another concern is the growing disparity in China between the “haves”
and the “have-nots”:
“ ‘China is still a poor country with low per-capita income,’ notes Kenneth Rogoff, an
economics professor at Harvard University . . . ‘It still has this huge surplus labor
pool of at least 150 million unemployed workers in the countryside.’ ” (The Wall
Street Journal, June 27, 2005)
“A recent study conducted by the World Bank found that incomes among rural
Chinese – about three-fourths of the total population – have declined slightly in the
years since China entered the [World Trade Organization], while urban residents
have enjoyed modest gains.
“While free trade has proved highly efficient in generating wealth, it has failed to
share the spoils, intensifying gaps between rich and poor, urban and rural. In many
instances, new wealth is coming at the direct expense of the poor . . .
“In China, the divide between rich and poor is greater than before the peasant-led
revolution that brought the Communist Party to power in 1949.
“In Beijing, concern mounts that the rural poor are falling so far behind as to
challenge the legitimacy of the party. Demonstrations have become near-daily
occurrences as farmers protest . . .
“Some worry that rural poverty is a potential threat to the overall economy. China is
beset by a surplus of production, as over-exuberant investment erects too many
factories making more goods than the country needs. Policymakers are banking on
domestic consumption to absorb the surplus.” (Washington Post, July 12, 2005)
In June, in Chizhou, China, a student and a businessman were in a traffic
accident. The business man’s body guards beat the student. News spread
quickly, with the aid of the millions of cell phones now in use:
“A Chinese City’s Rage At the Rich And Powerful. Beating of Student Sparks
Riot, Looting.”
“The beating, part of a minor traffic incident on a slow Sunday afternoon, ignited a
spark of anger. The spark became a riot, evolving over eight chaotic hours into an
expression of rage against the Chinese Communist Party’s new fascination with
businessmen, profits and economic growth.
“ . . . Chizhou’s self-described ‘common people’ rose up against what they
perceived as their local government’s willingness to side with rich outside investors .
. . By the end of the evening, 10,000 Chizhou residents had filled the streets, some
of whom torched police cars, pelted overwhelmed anti-riot troops with stones and
looted a nearby supermarket bare.
“ . . . the riot here, like a growing number of flare-ups in other Chinese cities, was in
fact directed against the flourishing alliance of Communist Party officials and well-
connected businessmen that runs Chizhou. Before calm returned to the streets, the
disturbance had become a political rebellion against the increasingly intimate
connection in modern China between big money and Communist government.
“ ‘When anger boils up in your heart so long, it has to burst,’ said a Chizhou man
who was part of the crowd that night.
“Recently, the resentment has exploded into violent protests, despite draconian
laws against attempts to challenge the party’s rule. Although press censorship
prevents an independent count, the government-funded Ta Kung Pao newspaper
said Public Security Minister Zhou Yongkang estimated that 3.76 million Chinese
were involved in 74,000 “mass incidents” during 2004.” (Washingtonpost.com,
August 1, 2005)
One of the tools an authoritarian government needs in order to maintain
power is control of information.
“More than 100 million Chinese now use the internet, up 18% in just the past six
months, while . . . 360 million Chinese [use] cell phones.” (BusinessWeek.com,
August 8, 2005)
Conclusion
I am not predicting the imminent end to China’s rapid economic expansion. Its
economy may or may not continue to grow for years to come. I am, however,
highlighting what I believe to be a risk to the “Chinese Miracle” that is not being
widely discussed. It seems that if it cannot bring greater prosperity to the 75% of its
people who live in rural areas, restore faith in its financial markets, and root out
corruption, that the long-term sustainability of China’s expansion should be doubted.
The impact of a disruption of China’s economic growth, whatever the cause, would
likely be seen in interest rates, in the flow of exports to China, and in damage to our
financial markets. While as investors we can enjoy the benefits that China’s
expansion has on the US economy, our investment strategies are hopefully nimble
enough to avoid much of the pain associated with any possible contraction.
hurting import growth from other countries.
Some pundits worry that China will use its huge profits to buy up foreign companies.
Others worry that China will stop investing it profits in US bonds, thus driving
interest rates up, and choking off economic growth here.
There is evidence to support and defend any point of view, and I am not going to
address here any of these concerns. Rather, I want to raise a different, more
significant concern. I believe there is mounting risk that the structural flaws
in Chinese society may significantly disrupt China’s economic expansion.
While I have no ability to predict when (or if) such disruption will occur, I do believe
investors should be aware of the risk, and reflect upon the consequences such a
disruption would have on their portfolios.
Investing is primarily a process of risk management and control. The wise investor
vigilantly watches for those things that can harm a portfolio, letting the good “luck”
take care of itself. With that in mind, I am sharing here some of the evidence I have
seen to cause me to be concerned about China.
-----------------------------------------
One concern is the inefficient allocation of resources in a centrally
controlled economy:
“ ‘We are using too many raw materials to sustain this growth,’ said Pan Yue, China’
s environment minister . . . ‘To produce goods worth $10,000, for example, we need
seven times more resources than Japan, nearly six times more than the United
States and, perhaps most embarrassing, nearly three times more than India.’
“Others worry about China’s seeming addiction to large investment, which leads to
huge waste and steep cyclical downturns, a shaky financial system imperiled by a
huge burden of nonperforming loans, and rampant official corruption.” (New York
Times, April 10, 2005)
China’s economy grew by 53% between 2000 and 2004. How was this
reflected in the Chinese stock markets? . . .
“As the market plumbs six-year lows, China’s 60 million retail investors are an
embittered lot – sounding a jarring note amid the capitalist changes transforming
China’s economy. The government once touted the nation’s two stock exchanges,
started in 1990 and 1991, as founts of opportunity. But they have turned out to be
full of rotten companies that relied on political connections to get listed.
“For the ruling Communist Party, the rage of investors who have lost their nest eggs
could be toxic. The party has long struggled to keep a lid on social unrest,
especially among unemployed workers and overtaxed farmers. Now a big chunk of
the middle class is angry, too. In a recent online survey of 200,000 people by the
official Xinhau News Agency, the poor-performing stock market ranked as the
biggest concern, beating out corruption, the No. 2 worry, by a 3-to-1 margin.
“The public expressions of displeasure with the stock market . . . reflect a culture of
protesting that has grown over the past decade. The government now accepts
protests over corruption, pollution and other disputes as routine, so long as the
protesters don’t attack the core principles of Communist rule or challenge top
leaders.
“In a nation that lacks polls to measure top leaders’ approval ratings or independent
media outlets, the direction of share prices is one of the few genuine barometers of
public sentiment.” (The Wall Street Journal, April 21, 2005)
“Nearly every week, regulators announce a new initiative aimed at shoring up the
slumping market. Despite such efforts, stock prices have continued to slide. . . . the
stock market has been tumbling amid allegations of accounting fraud, poor
corporate governance and continued government interference in business
operations.” (New York Times, June 15, 2005)
Another concern is the growing disparity in China between the “haves”
and the “have-nots”:
“ ‘China is still a poor country with low per-capita income,’ notes Kenneth Rogoff, an
economics professor at Harvard University . . . ‘It still has this huge surplus labor
pool of at least 150 million unemployed workers in the countryside.’ ” (The Wall
Street Journal, June 27, 2005)
“A recent study conducted by the World Bank found that incomes among rural
Chinese – about three-fourths of the total population – have declined slightly in the
years since China entered the [World Trade Organization], while urban residents
have enjoyed modest gains.
“While free trade has proved highly efficient in generating wealth, it has failed to
share the spoils, intensifying gaps between rich and poor, urban and rural. In many
instances, new wealth is coming at the direct expense of the poor . . .
“In China, the divide between rich and poor is greater than before the peasant-led
revolution that brought the Communist Party to power in 1949.
“In Beijing, concern mounts that the rural poor are falling so far behind as to
challenge the legitimacy of the party. Demonstrations have become near-daily
occurrences as farmers protest . . .
“Some worry that rural poverty is a potential threat to the overall economy. China is
beset by a surplus of production, as over-exuberant investment erects too many
factories making more goods than the country needs. Policymakers are banking on
domestic consumption to absorb the surplus.” (Washington Post, July 12, 2005)
In June, in Chizhou, China, a student and a businessman were in a traffic
accident. The business man’s body guards beat the student. News spread
quickly, with the aid of the millions of cell phones now in use:
“A Chinese City’s Rage At the Rich And Powerful. Beating of Student Sparks
Riot, Looting.”
“The beating, part of a minor traffic incident on a slow Sunday afternoon, ignited a
spark of anger. The spark became a riot, evolving over eight chaotic hours into an
expression of rage against the Chinese Communist Party’s new fascination with
businessmen, profits and economic growth.
“ . . . Chizhou’s self-described ‘common people’ rose up against what they
perceived as their local government’s willingness to side with rich outside investors .
. . By the end of the evening, 10,000 Chizhou residents had filled the streets, some
of whom torched police cars, pelted overwhelmed anti-riot troops with stones and
looted a nearby supermarket bare.
“ . . . the riot here, like a growing number of flare-ups in other Chinese cities, was in
fact directed against the flourishing alliance of Communist Party officials and well-
connected businessmen that runs Chizhou. Before calm returned to the streets, the
disturbance had become a political rebellion against the increasingly intimate
connection in modern China between big money and Communist government.
“ ‘When anger boils up in your heart so long, it has to burst,’ said a Chizhou man
who was part of the crowd that night.
“Recently, the resentment has exploded into violent protests, despite draconian
laws against attempts to challenge the party’s rule. Although press censorship
prevents an independent count, the government-funded Ta Kung Pao newspaper
said Public Security Minister Zhou Yongkang estimated that 3.76 million Chinese
were involved in 74,000 “mass incidents” during 2004.” (Washingtonpost.com,
August 1, 2005)
One of the tools an authoritarian government needs in order to maintain
power is control of information.
“More than 100 million Chinese now use the internet, up 18% in just the past six
months, while . . . 360 million Chinese [use] cell phones.” (BusinessWeek.com,
August 8, 2005)
Conclusion
I am not predicting the imminent end to China’s rapid economic expansion. Its
economy may or may not continue to grow for years to come. I am, however,
highlighting what I believe to be a risk to the “Chinese Miracle” that is not being
widely discussed. It seems that if it cannot bring greater prosperity to the 75% of its
people who live in rural areas, restore faith in its financial markets, and root out
corruption, that the long-term sustainability of China’s expansion should be doubted.
The impact of a disruption of China’s economic growth, whatever the cause, would
likely be seen in interest rates, in the flow of exports to China, and in damage to our
financial markets. While as investors we can enjoy the benefits that China’s
expansion has on the US economy, our investment strategies are hopefully nimble
enough to avoid much of the pain associated with any possible contraction.
This is intended for educational purposes only. This should not be construed as a
recommendation to buy or sell any security. The information contained herein is not meant to
constitute specific investment advice. An investor should consult with Don A. Slabaugh (DAS), or
his or her own professional financial adviser (if not DAS), prior to acting on any of the information
stated above.
recommendation to buy or sell any security. The information contained herein is not meant to
constitute specific investment advice. An investor should consult with Don A. Slabaugh (DAS), or
his or her own professional financial adviser (if not DAS), prior to acting on any of the information
stated above.
| justdontwanttobepoor.com |
| Don A. Slabaugh, LLC, 4335 Heartwood, Okemos, MI 48864 (517) 337-7804 |
| email me at donslabaugh@yahoo.com |
| ========================================================= |