CapitalistMarks

China going bust?

Posted on 31. Aug, 2009 by scott in Social commentary, economic daydreaming

First of all, the headline today might seem weird for a country with a growing economy (maybe as much as 10% this year) and a stock market that has been up nearly 100% since the first of the year.

But let me give you some of the info behind the headline.

Interestingly, I heard an interview with a Chinese national on TV over the weekend.  I wish I could tell you who and where but it has been lost in the flood of stuff I watched and read.  The key was his statement about China’s lack of a social safety net for their working class citizens.

This discussion really woke me up.  I was surprised, frankly, because this was the first time I have heard this particular issue brought up by an American news channel.  But it is right and with the time I have spent in China I have seen first hand the horrible way they treat their work force (including pay, benefits and bonuses).  Frankly I didn’t like having my products made their because I felt like I WAS TAKING ADVANTAGE.  Truth is that it is the Chinese elite leaders who are the real culprits here.

How does this affect us?

We all know that America’s consumers have been driving the international markets for many decades.  This is coming to a halt as savings have gone from literally negative to approaching double digits.  Americans are feeling insecure (deservedly so) and are starting to put money away for a rainy day (or year or two).  Consequently our economy has come to a screeching halt in the worst recession since the Great Depression.  We are no longer feeding China’s export frenzy.

Of course this has had a tremendous impact on other countries which export goods to us.  The more we save, the less we spend, the less goods fly off the shelves and the less imports there are.

China’s approach to dealing with the recession has been to flood different regions with billions of economic stimulus–most of which was intended to increase employment through important infrastructure projects.  And it worked (unlike Obama’s stimulus so far).  Their economy will definitely grow this year and the U.S. economy is likely to shrink 3-4%.

The positive impact of China’s stimulus has been a boon to their stock market, which doubled in $$ terms in the first 7 months of the year.  But — and this is a big one — in August the Shanghai index fell 25% . . . 10% in just the last few days, including nearly 7% today alone!  Those are scary numbers for those who have been ‘piling’ on in Chinese stocks.

Further, consider that shares in China’s markets trade at an average of 31 times trailing earnings which is more than twice that of the U.S. markets long-term average (around 15).  Add to that the fact that traded Chinese companies have had earnings declines this year of around 20% and you have a possible (?) bubble — – –

Is it an early warning signal of a bust?  Could be.

On top of all this, many economists believe (me included given the penchant for gambling in China) that the tremendous increase in bank loans encouraged by the Chinese government has resulted in at least some of the extra money that was pumped into the system going into stocks rather than for business purposes to grow GDP.  Ouch!  Their bankers may have to take a ‘time out.’

And now, thanks to the above mentioned interview, I can see the writing on the wall and further understand the real risks here.  You see the average Chinese worker has no social safety net at ALL!  No health insurance, no retirement, no job guarantees and no hope that their government is about to offer any.  This means they MUST save for an uncertain future.  And they are not about to go on a spending spree (not the majority anyway).

All this talk of the Chinese consumer stepping up to grow their economy into the world’s second biggest soon is smoke and mirrors right now as long as the employment benefits situation there remains the same.  Sure there is a wealthy and growing upper middle class who will spend but they are a small percentage of the whole.

If you remember last week, I pointed out that 91% of all Chinese multi-millionaires are children of high ranking communist party elite.  The old story of the rich get richer and the poor get poorer only multiplied by 1.3 billion people!  There is something rotten in THAT woodpile!

The Chinese worker must save.  The Chinese government will not continue their effective and costly infrastructure stimulus for much longer.

Then what.

A Chinese bubble will very likely burst.  All because there is no incentive for the 500 million workers to spend their money at KFC let alone the local equivalent of Sears or Target.

What will the damage be?  Surely a steep drop in their markets, but also the possibility of lower wages and lower raw materials for a while, and that could stimulate the export market once again and encourage American’s and Europeans to start buying again.

So the talk of America starting this whole thing might be lost in the future talk of China extending the problems with economic decline.  And that just might help the big industrial nations who have suffered so much initially as Chinese goods get cheaper (and hopefully better — are Chinses Auto imports far off?).

It is all a big ‘circle’ of economic interests.

I think tomorrow and for the next few days I might write about the other BRIC countries and my expectations for their future.  Stay tuned.  Russia.  India.  Brazil.  Coming up next (unless something else catches my fancy).

Toodaloo!

thanks to flickr’s numb3r for the photo

Tags: bric nations, chinese economy, consumer spending, economic stimulus