There is reason to believe investments in China will eventually be worthless for firms such as PetroChina (PTR) and China Life (LFC) and that the supply chains of companies sourcing in China such as Apple (AAPL) and Walmart (WMT) will eventually be broken. The question now is how soon? (There is an entire December 26 Seeking Alpha article "Why Investments in China Will Eventually Be Worthless" explaining why this will occur.)
Presently there is an implicit social contract between the Chinese people and their ostensibly communist government: the people don't challenge the government and, in exchange, get a degree of economic freedom and access to better paying jobs. In essence, the political leadership provides stability and mostly low-wage job opportunities and, in exchange, gets to remain in control while its officials and their cronies get rich.
In other words, the situation is similar to that which prevailed until recently in Tunesia, Yemen, Libya, Eygpt, and Syria - because there is no democracy and no rule of law there is no way except revolution to change the government.
China's Social Contract is breaking faster than expected.
Recent indicators and activities suggest the investment collapse and end of Chinese producers as reliable supply sources may occur sooner than was initially expected. The people's social contract with the Party appears to be rapidly breaking down - and there will be the usual chaos, collapse, and redistribution of wealth and power when it does.
China's basic and accelerating problem is the lack of the rule of law and the all-encompassing corruption that has been enriching government officials and their cronies while leaving great masses of Chinese people throughout the entire country in relative poverty.
In a word, the income distribution is worsening and civil and political upheaval appears to be accelerating - just as it did in Tunesia, Libya, Yemen, Eygpt, and Syria, and earlier in Russia and the USSR.
The indicators confirming the coming collapse.
The first indicator is the huge increase in the Chinese demand for gold. Gold is where people go when they cannot actually leave a distressed economy. It is a very significant indicator of what the Chinese man-in-the-street thinks of the future that China imported 428 tons of gold from Hong Kong in 2011 compared to 119 tons in 2010. In essence, people who can't get out of the country are moving their wealth into gold.
The second indicator is related to the first - the apparent unwillingness of the man-in-the-street to deposit money into Chinese banks. The banks are extensions of the government which provides their funds and directs their lending. If the government changes the banks will almost certainly collapse or significantly change.
The third indicator is the recent increase of wealthy Chinese buying property and investing overseas instead of in China and Chinese manufacturers such as Foxconn (FXCNF.PK) establishing overseas operations in places such as Mexico, Brazil, and the Czech Republic despite their labor costs being higher than in China.
The fourth indicator is that Apple (APPL) and Walmart (WMT) have begun diversifying their supply changes away from China, apparently as fast as they can. Its what savvy companies do when they see problems ahead.
The fifth indicator is the effort of the Chinese government to suppress the news and prevent communications between its potential opponents. Syria's doing the same thing. It's what authoritarian governments do when they are afraid of their own people.
The sixth indicator is social unrest. In 2010 there appears to have been as many as 180,000 "mass incidents" - public demonstrations and protests against public officials and policies - despite jailings, beatings, and deaths. That's up from 87,000 in 2005.
They included protests over unpaid wages, taxes, lay offs, land seizures, factory closings, poor working conditions, corruption, misuse of funds, ethnic tensions, forced immigration and police abuse. Some of them have been quite large and violent. In addition to the mass incidents, lone individuals are increasingly adding to protest incidents.
The village of Wukan is indicative of them: the local population rose en masse and drove out its corrupt longtime local communist chief because, without consultation or adequate compensation, he sold a significant portion of the village's co-operative agricultural land to property developers - and a representative of the villagers was then arrested for filing a complaint and died (the villagers say murdered) while in police custody.
A seventh indicator is false - Vice President Biden' recently claimed that China's growth would be limited in the future because it has been limiting most couples to one child such that its population will not be growing in the decades ahead.
Biden is wrong: China's population policy may well indicate a repressive and hated government but what best measures a country's prosperity is the prosperity of its people - its income per capita, not its total output. In other words, an economy's success depends on the productivity of its people and the incomes they receive - and that depends on their educations, entrepreneurial spirit, and the technology and capital they employ, not their ability to successfully fornicate.
In essence, the Chinese people and their government know big problems are coming and are doing their best to get ready for them. Investors should heed their warnings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
