Is the exceptionally booming Chinese economy in the midst of a global financial crisis a bubble? That is a question people ask. Many people believe China's growth is unsustainable. Without the consumption of the western world, Chinese enterprises have nowhere to sell their products. Some people just do not trust data released by the Chinese government. They think the data are fabricated to paint a rosier picture than reality. On the other hand, people like Jim Rogers believe the Chinese are the best free market capitalists in the world; and there is still huge growth potential in China for decades to come.
Among all the naysayers, Mr. Karl Denninger provided the most elegant proof that China is a bubble. He proved that mathematically anything that grows a certain percentage year over year, will reach infinity if the growth is sustained. Since infinity is physically impossible, the growth must be stopped at a certain point. I agree with Mr. Denninger that nothing grows forever. There are always physical limits to growth. I believe we are probably close to the point that the growth of the global economy itself is bouncing against the limited carrying capacity of the the natural resources of this planet itself. China, or any country for that matter, cannot keep growing at high speed forever. But that is NOT the question people are asking. We want to know if China's current growth is real. Can it be sustained for a few decades, or has it reaches the bubble stage?
You can not answer this question without visiting China and making your own observations. Many naysayers have not been to China recently. They probably do read news reports coming from China and then draw their conclusions based on what they hear. The problem is such second hand reports may or may not be true, but they surely do not reflect the whole picture. Drawing conclusions based on a partial picture is dangerous. It is difficult to see a whole picture if you merely read a few internet information source on China. I am visiting China right now and I am struggling to get that whole picture view of China. Fortunately, I can interact with the average folks in China so it is easy to find answers that puzzle most westerners.
For example, a widely cited argument is that the booming official auto sales number is not justified by the unremarkable increase of gasoline consumption in China. It defies logic that people would not burn more gasoline if they own more cars. Some analysts suspect that government agencies probably bought a lot of new cars merely to boost the numbers, and then simply park the cars in garages. Some simply assume that the Chinese government made up fictitious numbers.
Once I got to China, I found the answer to the logical paradox easily. The booming auto sales is a real phenomena. People, not government agencies, do buy new cars, not because of car buying incentives, but because they really need the cars, and that their incomes can afford cars now. And yes it is also true they do park their cars some of the days. In America, you can walk into any car dealer empty handed and within half an hour, you drive home a brand new vehicle, bought on car loans and properly registered with the DMV already. No such easy deal in China. Most people pay cash. Dealers will not even talk to you if you do not have cash in hand. You have to register your intention to buy more than three months ahead and wait three months to get the new car and register the license plate, as there is a limit how many new license plates can be issued and auctioned off per months. The money spent on acquiring a license plate number exceeds all other costs save the cost of the car itself and the cost of obtaining a reserved parking space. (It costs Y80K, or US$11.5K just to obtain a reserved parking lot below the residential building where you live.)
The cities in China have huge infrastructure problems. Not that they have not spent money on infrastructure developments. They did spend a lot of money building highways, roads, parking spaces, shopping centers and all that. But all the infrastructure building can not catch up with the pace in which peoples' quality of life is improving. The people have more money, they own more stuff, consume more, and demand more of everything. The city I am visiting has much more and much better highways and roads but even more cars. Giant construction cranes can be spotted everywhere. New highway bridges and subway routes are mushrooming. The whole city is dusty and foggy with terrible air quality, even right after a snow fall. But for now, the road system of the city is still severely congested.
The solution they are forced to adopt is the same as in many other Chinese cities; in major sections of the city, based on the calendar days, they alternatively allow only cars of even or odd license plate numbers on the streets. Violators are fined. Repeated violations result in confiscation of your car. (I did not ask what about around midnight time.) So what's the solution for the people? People who can afford it own two cars, one each with even and odd license plate. So on any given day, there is always one car they can drive.
China, as the world's most populated country and a major economy, is experiencing growing pains in its high speed economic growth. Yes, there are problems, there are negatives, there are dark sides. Are those things fundamental? No. They are not the whole picture. They do not represent where China stands now and where the Chinese economy is going. I have just solved the first China bubble paradox: Booming auto sales versus flat growth of gasoline consumption. In the next article I will solve the next China bubble paradox: Skyrocketing housing prices versus the limited affordability of the average Chinese folks.
Disclosure: The author does not have positions pertaining to the discussion in this article.