Thursday, March 10, 2011

Betting Against China

In a previous post, I took Glenn Beck to task for fear mongering on China. The crux of my argument is two-fold. First, China's demographics portend long-term problems for the nation, due to lack of young people to support retirees in a few decades and a lack of young women compared to young men that will have negative social impact. Second, China's growth is driven by the direction of credit at the national level to favored industries. Such a model is unsustainable for two reasons. Inevitably, mistakes will be made and political pressures will cause investment to be redirected.

A couple of articles in today's WSJ reinforce my points.

Beijing Directs More Funds Toward Affordable Housing

Low and behold even the dictators in Beijing aren't immune to political pressure, take note Thomas Friedman, you miserable hack. So China is worried about the political problems caused by a lack of affordable housing including middle class anger. And where is the money coming from?
Only a portion of those sums comes from spending by central and local governments, with the rest coming from bank credit and corporate investment.
That means there is $200 billion less for investment in so called strategic industries.

Inflation in Asia Strikes at Core
It's Not Just Food Prices Anymore; Too-Fast Growth Strains Countries' Capacity, Raises Labor Costs

While China is not the main subject of this article, its labor costs are rising (and common sense tells me that demographics are a factor.)
Recruiters say it is getting harder to lure workers from places like China, where rapid economic growth of recent years has pushed wages higher and created more opportunities at home.
The rising labor costs will inevitably mean that China's global competitive advantage will erode. Since their work force doesn't speak English, the international language of commerce, to the extent that India's does, they are put at a competitive disadvantage.

China Logs Surprise Trade Deficit

This headline speaks for itself. While it only refers to one month's data, the trend of a reduced trade deficit is likely to continue. Why does this matter? The trade deficit allows Beijing to hoard dollars for direct investment, which may now be curtailed.

Like an idiot, I didn't check on Professor Perry's Carpe Diem blog before starting this post. He has evidence that U.S. small businesses are reversing the offshoring trend. It seems like shipping costs and rising labor costs in China, as well as inconsistent quality are making China an unreliable business partner. The comments section is worth the read as well.

Finally a picture sometimes says it all. How much longer will Chinese tolerate growth that results in this?


  1. I think that smog cloud is key. Polluting your environment is like taking on debt. You're getting a big rush of income now, but you'll have to pay it back later. In this case, you'll have to pay it back in clean up costs.

    I agree with you, China is building up a lot of headwinds.

  2. Really great piece! The underbelly of China's economy is flying way under the radar, and you are right on the mark. It may take a long time, but they will pay for lopsided policies just like the rest of us.

  3. KT, Sarah,
    Thanks for commenting and agree.