China's Bubbles and Demographic Trends

In recent weeks, many experts have expressed growing concern about a bubble forming in China's stock and property markets. While investors love it when prices rise, many observers fail to realize the hidden and harmful impact it has on worker productivity, competitiveness, and demographic trends.

As part of Beijing's effort to stimulate the economy, Chinese banks made $1.08 trillion in loans in the first six months of 2009, triple the year-earlier level. While most of that was intended for new roads, bridges, and factories, an estimated 20 percent was put into stocks by business managers seeking quick profits.

Andy Xie, an independent economist based in Shanghai, recently warned in a blog post that Chinese stocks and properties are 50-100% overvalued. "The odds are that both will adjust in the fourth quarter (of 2009)," predicts Xie. “However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future."

Frank Gong, chief economist for China at JPMorgan Chase was quoted in Businessweek as saying, "Equity markets are supposed to do that." Gong and others argue it's unlikely the government will choke off credit, because no one wants to be blamed for slowing China's recovery.

Xie calls China's asset markets a giant Ponzi scheme and predicts they will collapse when the US dollar becomes stronger. He warns, "The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn't last."

When a bubble is formed, more resources are diverted and wasted. Xie says businessmen in China are reluctant to focus on real economic activities and are devoting time and energy to market speculation. This means China will have fewer globally competitive companies in the future. “Even though China has had three decades of high growth, few companies are globally competitive,” Xie says. “The serial bubble making in the Chinese economy may be the reason.”

The most serious damage that a property bubble inflicts is in changing demographics, says Xie. High property prices force many young couples to have fewer children. Even after property prices decline after a bubble bursts, this low birth rate culture cannot be changed. Many parts of Asia, such as Hong Kong, Japan, and South Korea, all went through property bubbles during their development. Xie concludes:

Their birth rates dropped during the bubbles and didn't recover afterwards despite government providing incentives. China's one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn't be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.

Experts worry that China will become old before it becomes rich. Back in 2004, Richard Jackson and Neil Howe wrote a report about demographic trends entitled The Graying of the Middle Kingdom. They calculated that in 2004 the elderly — here defined as adults aged 60 and over — make up just 11 percent of the population. By 2040, however, the United Nations projects that the share will rise to 28 percent, a larger elder share than it projects for the United States.

In absolute numbers, the magnitude of China's coming age wave is staggering. By 2040, assuming current demographic trends continue, there will be 397 million Chinese elderly people, which is more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined.

Disclosure: None

Comments

[User 250263:]

elder means unstoppable declining of asset value? look at japan, an old country but one of the highest property price, for all asian, property is the root.

Aug 11 12:31 AM

[williamwu:]

enough of the doom and gloom. For every problem there will be a solution. Never underestimate the ability of the human brain. When it comes to IQ... don't you know that East Asians have the highest avg in the world? China just needs to get its act together and concentrate on making technological advances and innovation. With over a billion above average IQs... I'm sure it can be done!

Aug 11 03:25 AM

[HaavBline:]

Bubblemania.

Everybody is calling everything bubbles this days. A 5% correction can be called a mini-bursting of a bubble. A bubble can be a looooong one that fluctuates up and down.

Some one might as well come up with measurements for bubbliness and a set of bubbliness index to replace all other market indices.

Maybe 'bubble' will be replacing 'market' in the English dictionary soon.

Aug 11 11:59 AM

[Anthony Alfidi:]

Chinese equities are definitely volatile and probably overvalued (short term), but hoping for a strong dollar to take them down is a long shot. The U.S.'s inflationary bent can only weaken the dollar, making yuan-denominated assets look good by comparison.

How do you say "bubble" in Chinese? :-)

Aug 11 12:29 PM

[Mad Hedge F...:]

cvn, Car sales are soaring by 48% to a 12 million unit annual rate. Consumer spending is exploding. Property is going crazy, with prices and volumes back to all time highs. The bubble is back. No, I’m not talking about the US, dummy, it’s China. I’m amazed that the Middle Kingdom’s car sales have exceed those of the US for the first time in history without a peep from the press, a feat that Germany and Japan were never able to pull off. It just shows how much time we are wasting gazing at our own navel. Too bad they don’t have enough roads to drive them on. The big question is how long until China take over the world market? See my earlier piece on BYD Motors at www.madhedgefundtrader.... That’s what happens when your stimulus package gets spent on stimulus, and not on a 12 year backlog of pork.

Aug 11 01:06 PM

[Alphameister:]

If the nonsense quoted above from Andy Xie is any indication, it doesn't take a very big IQ to become a "China expert." I hope Xie continues with the chicken-little warnings so my very undervalued Chinese stocks can continue to climb a Great Wall of Worry.

Aug 11 01:06 PM

[Alphameister:]

"The final frenzy usually doesn't last." (That's why it's called "final" Andy.) And you have no evidence whatsoever that the current "frenzy" is anywhere near being "final." As for the Chinese market being a Ponzi scheme, you obviously have no understanding of the nature of a Ponzi scheme other than an inchoate awareness that it leads to a bad ending.

Aug 11 01:10 PM

[Consider_this:]

I've never seen so many shouting and yelling about China stocks being overvalued in my life. There're 5-6 articles on this position alone on the front page *PER DAY* on SA. This is similar to what you find on blogs, forums, financial websites.

If it's due to "concern" and kind advice for the investors, this quantity of unsolicited is giving me a lot of "warm and fuzzy". Wow, such caring words from so many people who want to look out for my interests! Words from people on Wall Street and financial companies! Ah... I must express gratitude at their graciousness and concern.

On the other hand, the cynical side of me can't shake the feeling that some fund managers and/or hedgies have missed the boat (and missing the market average, and they're due to be compared to the average soon, as Q3 closes), and are trying to "talk down" the market so they and their clients can get on.

Or it could be shorts with a bearish position, trying to talk down the market to alleviate existing losses or make new positions.

I don't doubt that viewpoints on "bubble or not" exists all the time, but when articles clamor endlessly and without solicitations to incite selling, esp in great quantities and with forceful assertions, I tend to disbelieve.

Call me a media skeptic.

Aug 11 01:11 PM

[Carlos Lam:]

On Aug 11 01:06 PM Alphameister wrote:

> If the nonsense quoted above from Andy Xie is any indication, it
> doesn't take a very big IQ to become a "China expert." I hope Xie
> continues with the chicken-little warnings so my very undervalued
> Chinese stocks can continue to climb a Great Wall of Worry.

Well, China's central bank has flooded that nation with liquidity, so there may be certain short-term hiccups due to some malinvestments. Longer-term, though, I'd agree that it's foolhardy to bet against 1 billion people who currently have a production- and saving-oriented culture. Moreover, their central government seems to be taking the necessary steps to ensure that growth & development take root by decreasing business regulations on foreign and domestic firms and entrepreneurs.

On the other hand, in the really longer-term, there is no question that there will be a growing cohort of Chinese elderly supported by fewer and fewer working-age Chinese citizens. This is the equivalent of our Social Security problem: more and more retirees depend on fewer and fewer current workers. At some point, there will have to be some sort of adjustment on the part of China due to this changing situation.

Aug 11 01:18 PM

[Susan Weerts:]

Andy Xie correctly predicted the top of the Chinese Stock Market at its peak of 2007 and its inherit economics/social problems. He is two or more steps ahead of any other Chinese experts. His sharp /often critic insights stems from his background and understandings how the business acturally works behind the scene. Unlikely a lot of Western analysts, he didn't take the top executives' words for granted. He is able to see through the fancy banquets and show-case exhibitions displayed by the locales. It is so easy to get fooled by the glitter skyscrapers, heart-warming receiptions, and sometimes intentional or unintentional lost-in-translations. Often the top western analysts rely on the junior associates, the hired locals, to gather and scrutinize the informations. Ambitious, these local juniors often have “getting rick quick” as their motto. It doesn't take too much to make them to skew the information, sometimes the free shares of IPO, free apartments, and even a few of visits to night clubs. As long as Chinese economics is still growing and hot moneys are still pouring in, everything is fine. That is what the PONZi Schem that Mr. Xie refers to.

How many people here has ever been China? Or just on business trip a few times a year to China?

As for the high saving rate we so touted about. Let's break down demographically. The group who save most are the retirees and the migrant workers. The retirees endured the hardship during the culture revolutionary. They will not spend anything on themselves and often give moneys to their kids to buy apartments and sometime cars. In turn, they are hoping their kids to support them when they get sick. Their propensity to continue saving is limited.

On the opposite end, the youngsters (20-40s) are aspiration consumers. They have very low often nil saving rates. They are driving forces behind the growth of Chinese consumptions. However, they have the heaviest burden as they are supposed to support two parents and two sets of grandparents.

You can group the 40-60s into two groups, who have made it and who have not. For those who has made it, they are likely to consume some things that deems luxury by the ordinary Chinese, such as international tourism and luxury brand name goods. For those didn't, they will continue saving heavily.

There is no doubts that the Chinese population ages rapidly and population growth might topple. Although I'm a China Bear, I do see growth in tourism, gaming, luxury goods, health care (especially nursing home) in the near term.

Aug 11 03:52 PM

[Pax Americana:]

The Demographic trend after 2040 does indeed appear daunting, as their is a direct correlation between median age, and propensity to consume durable goods.All assuming that China, graduates from an essentially producer of "Consumer goods" to a more service orientated society.

Aug 11 04:02 PM

[puravidavid...:]

I agree, Brian - "Gong and others argue it's unlikely the government will choke off credit, because no one wants to be blamed for slowing China's recovery."

Central bankers everywhere seem willing to push the envelope, creating credit in excess of wise usefulness. The cycle always ends badly, but while the bubble is blowing larger, the mania consumes the beneficiaries of leverage and proximity to money creation.

It's not different this time, or in this place called China.

Aug 11 04:12 PM

[Moon Kil Woong:]

Unlike the US and the West, the elderly in China don't live as long and their medical system isn't overburdened with paperwork and waste.

The main concern is really an asset bubble in money flowing into property and commodities and not into real demand or productivity, not declining demand due to a population stagnation. In fact, to China growth under 5% is considered terrible. That in itself is a signal that they have grown way too addicted to export growth. Can their internal economy grow as fast without ficticious printing of money? Certainly not.

They should be praying on a speedy US recovery and stop undermining the US Treasury bond market. Their economic survival and stability depends on it. Whether or not they want to admit is is another matter.

Aug 11 10:34 PM

[ron_paulite:]

bubble
泡沫
pao mo
(4) (4)

agree. usd has limited upside.

On Aug 11 12:29 PM Anthony Alfidi wrote:

> Chinese equities are definitely volatile and probably overvalued
> (short term), but hoping for a strong dollar to take them down is
> a long shot. The U.S.'s inflationary bent can only weaken the dollar,
> making yuan-denominated assets look good by comparison.
>
> How do you say "bubble" in Chinese? :-)

Aug 12 01:53 AM

[Carneades:]

Quantitative measurements of intelligence - including but not limited to the "IQ" test - are extremely irrelevant when considering a person's ability to devise and implement an effective business strategy.

You however - an intelligent man with a presumably impressive IQ - already know and understand this distinction between various forms of "intelligence". Don't you?


On Aug 11 03:25 AM williamwu wrote:

> enough of the doom and gloom. For every problem there will be a
> solution. Never underestimate the ability of the human brain. When
> it comes to IQ... don't you know that East Asians have the highest
> avg in the world? China just needs to get its act together and concentrate
> on making technological advances and innovation. With over a billion
> above average IQs... I'm sure it can be done!

Aug 12 10:25 AM