Is it safe to say that Jim Channos is right when saying that China is in a bubble waiting to burst? I mean lets look at the specifics:
Ecess commercial property plus undercapacity in occupancy. Buildings that just sit empty.
Huge increases in food prices due to inflation as a result of the central bank printing money. All in the name of "9% annual growth". Where is that growth coming from? the masters at the politburo cooking up the books to make themselves look more powerful to the rest of the world? Or is it genuine, even though most people don't make much money.
Asset bubble in construction. Adam Smith said mercantilism does not work. Well China is doing it and the cracks are starting to appear. I think there are more examples of a bubble economy but I will stop at this point.
Does anyone agree with me? While Jim Rogers is an excellent investor, his book on the bull market in China is utter nonsense. If China is engaging in central planning, how can it possibly have a sound economy?
Yes, the bubble in China is starting to appear. It is from the Mercantilists in China who have control over the government. These folks have purchased hundreds of billions in US Gov bonds in an attempt to maintain their trade relationship with the USA despite USA attempts to devalue its currency. In effect the Chinese have had to create more of their currency as the USA does the same. This currency creation has created a huge bubble in realestate.
As for central planning, the Chinese government is practicing their long standing policy of "benign neglect" and is letting the people there do more and more for themselves. At the current rates of the expansion of freedom in China and the loss of it in the USA, the Chinese people will be freer than those in the USA in the not to far away future.
Just some thoughts:
Peter Schiff says the Chinese economy is fundamentally sound. The first reaction to that is: with all that monetary inflation, how can there not be huge malinvestment? Schiff however seems to give much more importance to the fact that China is a country that has investment backed by real savings (which indicates a sound economy). Also, it is a country where there is real productive capacity; real resources are there capable of producing goods, and there is nothing that will prevent them from working: even if their current owners will go bankrupt, that capital will stay productive, it will merely switch owner. I have the impression that long term he is right. Short term, however, there is going to be liquidation of the malinvestment and there might be a drop in the stock market (or just in the housing market? That would be nice to know). I am curious however how long and how big this drop will be. I am betting my money that the recession will be short and small.
At the moment I am extremely positive regarding South-East Asia countries (Thailand, Malaysia and Indonesia particularly) but still very cautious about China. The reason is that China is still a hybrid, half modern country and half Maoist command economy. It needs to choose a field, be it becoming a fully blown modern country (note: this doesn't mean becoming like the washed up US and Europe) or getting back at their old Maoist ways.
The present Chinese government abandoned Deng Xiaoping's cautious "slow transition" politics for quick gains. Growth targets are set in Beijing and must be respected no matter what. Apart from the well known housing boom (which is bound to burst in two years or so) China has developed overproduction in almost all sectors because of this policy. To partly offset this overproduction Beijing has implemented a politics of tax refunds for exporters: the government will pay you back up to 18% of the value exported. That's why our shops and warehouses are filled with Made in China crap nobody in his right mind would purchase: the manufacturers back in China can afford to sell with no profit or even at a loss because tax refunds will allow them to turn a profit nonetheless. When goods are so cheap, quality just doesn't matter. These of course are Stalinist "five years plan" politics thinly disguised as "free market reforms". And just like Stalin's five years plans they are dazzling the hapless Westerners: when I was in school everybody was astounded at how quick Soviet concrete and steel production grew from year to year. Many saw this as a sign of the superiority of the Soviet system. Then the Iron Curtain came crumbling down and the bluff was called.
The main difference between the Soviet Union and China is that China is at least giving some semblance of freedom to the "little guy". An ordinary person can open a small restaurant or workshop without the authorities troubling him too much. But if these individuals will evolve into a bustling middle class, the conditio sine qua non of real economic prosperity, it remains to be seen. A strong middle class is anthitetic to a meddling government: that's why the middle class in Europe and the US has been steadily shrinking since the '70s. It remains to be seen if Beijing will allow it to exist and prosper or will crush the embryo under its boot.
Allow me a final word about Jim Rogers: yes, he's an excellent investors but he also has his share of big mistakes like everyone else. Too much optimism about China can well be one of these. Be cautious and always see the glass half-empty.
I am now thinking about investing in China. Their stock markets are still very much down, so I though that would be a good opportunity to jump in. So you think its a bad idea?
My Etf MSCI china is not down at all. It recovered a lot in the last few months. They are now tightening the money supply, so (according to many, e.g. EconomicPoliciJournal) the malinvestment will get liquidated. You may want to invest then.