chennian

Is China the Next Great Bubble?

Many people think that export accounts for 37% of China's GDP. So when U.S. collapses, China will follow. But the truth is about 60% of China's export is based on processing imported materials. So when the export shrinks, so does the import. Much different from what the numbers tells us superficially, domestic consumption and investment makes up more than three fourths of the economy.

The value addition from exports accounts for a very small portion of the country's. It does affect a lot of people, because the export industry employed millions of workers. But their unemployment will not affect the domestic consumption too much. Rural migrant workers lags urban residents more than ten years in terms of spending (this worries many people in good times, but not in bad times)

Chinese government did set up huge infrastructure projects and encouraged banks to starting lending. But if you thinks the huge increase in China's bank loans is irresponsible, you are terribly wrong. The Chinese banks are annoyingly risk averse. I personally have 2 millions USD worth of home equity. I tried four months to secure a loan of 200k USD for my small business, but I failed. In China, you cannot borrow money against your house to buy cars, stocks, big screen TV, to take a vacation, to start up companies. All Chinese loan insurance companies will ask for collateral to help you get a loan.

Chinese did introduce some incentive programs to boost consumption and these programs started to deliver some results. But up till now, all the incentive programs are designed for low income people. In 1997, Shanghai successfully launched an incentive program which dragged the city out of a deep housing market slump caused by Asian financial crisis.

Unlike Americans, most Chinese live on surplus month by month. If they want to, it will not create any financial problems to them to increase their consumptions by ten or twenty percent.

The car prices in China are 50% to 200% more expensive than those in U.S. So are the insurance and gas. All those are either controlled and can be substantially imfluenced by the goverment. If the government can convince people that there is a bargain, then people will spend.

So don't worry about China. Worry about U.S. China is trapped by U.S. in treasury bills. China believes the ultimate devaluation of dollar and thus hyperinflation are inevitable. You can notice that China is gradually withdrawing from U.S. T bonds and buying commodities, both domestically and abroad. Buying domestically will help to smooth out the process of reducing overcapacity. Buying abroad will tranfer dollar devaluation risks to other countries and moreover help them to recover. In the future when hyperinflation comes, China will be able to protect itself and maybe make some fortune.