JX

Chinese Railways and Speculating Pig Farmers

As late as in the 1930s, there was sizable emigration of Japanese to Brazil for better life. In less than half a century, the migration between the two countries was almost exclusively from Brazil to Japan, with most Brazilian going to Japan taking lowly jobs that most Japanese don't want, certainly not teaching the best Japanese university in Portuguese for sure.

As late as in 2002, the per capita GDP (nominal) of Argentina was at least twice as much as that of Brazil. Argentines looked down Brazil as their poorer and darker neighbors -- you ought to hear the racist chants when their football (soccer) teams play against each other. Well, today thanks to the ubiquitous trucks and container ships bearing Chinese shipping companies' names in Brazil, Brazil's per capita GDP (nominal) is higher than that of Argentina, and likely quite a bit so in 2009.

The pecking orders between persons and nations change over time, and we all need to adjust. The investment cycle of high-speed train is very long. Chances are, at the midpoint of the investment cycle, the education of your average riders (by total school hours) of those HSTs is at least comparable if not better than their American and European counterparts.

China: More Trade Tensions

For every $1 import from China, by an estimate I read there is $3 GDP produced domestically in the US -- for instance upstream design, marketing, management, & downstream retail, distribution, repackage, etc. In your example of $250 billion reduced import from China, assuming everything else being equal, if we use that 1:3 ratio, the US would lose $500 billion in overall GDP (loss of $750 billion in domestic economic activities, and gain of $250 billion in less trade deficit).

On the other hand, to China that $250 billion loss in export to the US, assuming everything else being equal, will reduce the portion of the overall imports to produce that final $250 billion. The loss of GDP, a wild guess would be around $50 billion.

On Sep 25 11:50 AM CautiousInvestor wrote:
> To make the point and illustrate the challenge, let's assume US consumption
> on Chinese exports falls by $250 billion........a decline of 1.7%
> measured against our GDP. Given the differences in scale, the Chinese
> economy must increase spending by 5.7% to offset the contraction
> in the US.

China: More Trade Tensions

The bulk of the Shinkansen was built when one dollar was worth some 300 yens. You could easily make the same argument back in the 60s and the 70s it was a wasteful project in Japan, while its people was making matchbox cars and suffering from the like of Minamata Disease. Infrastructure investment has a very long return horizon, and continues paying dividends decades later. Most of the future users of the upcoming "wasteful" fast railroads and airports, by my back-of-the-envelope calculation, will likely have about the same expected lifetime school hours as their American counterparts, compared to their parents who had had half of the school hours.

China: Is Retail Growth a Proxy for Consumption Growth?

"Secondly, retail sales have been supposedly growing between 13% and 24% for the past six years, which even on an inflation-adjusted basis (I assume it is inflation that explains the late 2007 and early 2008 surge) significantly exceeds GDP growth."

This is simply false. Numbers prior to 2005 would take quite a bit efforts to gather given the upward GDP revision done by China's NSB in late 2005. In 2006, nominal GDP growth was 14.9% and retail sales growth was 13.7%; in 2007, nominal GDP growth was 17.8% and retail sales growth was 16.8%. I suspect numbers prior to 2005 will largely show the same pattern, i.e. nominal GDP growth slightly has been larger retail sales growth -- which is why supposedly private consumption as a percentage of the overall GDP gradually has decreased, as far as the numbers gathered and provided by NSB go.

If you are somebody who is actually selling something, you may ask how exactly an economy with the PCE as 1/8 of the America's manages to become the largest auto market in the world. A far more plausible explanation is,

* China's GDP is under-reported, especially in the service economy, which is likely severely under-reported.

* The service component in China's PCE pie, is getting larger and larger. Overall we don't know if the private consumption as a percentage of the overall GDP has increased or decreased.

China's Consumption Gap

If you go by those numbers, the domestic private consumption of China is roughly the same value as France's; and about 1/8 of the US'. But if you sell most of the meaningful things (from cars, computers, cell phones to commodities), China's market size is several times to an order of magnitude larger than France's, and sometimes larger than the US'. A lot of economic activities in China, especially in the service economy, are somewhat underdeveloped and severely under-reported.

China: Exactly Where Japan Was in the 1980s?

A better Japan comparison for China today would be Japan in 1965 -- both one year removed from being deemed worth of hosting the Olympic Games, and both's stock indexes traded quite a bit below their respective recent highs. Japan's per capita GDP was higher than the US' one in 1989, while China's in 2009 was only a fraction of the US' counterpart. It would take quite some ignorance to see any similarity between Japan in 1989 and China in 2009, other than the underlined assumption that the US as a nation would forever be the top dog and any would-be challengers are pretenders.

China's population base is some 10 times larger than that of Japan. If it was wrong in 1989 to assume that the Japanese workers on average would be perpetually much more productive than their American peers, it would be equally wrong to assume that the American workers would hold that advantage vis-a-vis their Chinese peers.

China and Emerging Market Investing: Real Basis

"For example, one story is the assumption that emerging markets will grow much faster than developed markets. Over the past fifty years this assumption has not been correct."

It's due to reverse survivorship bias: the best performing "developing" countries graduated and became "developed".

China: Bank Lending Out of Control

Anybody actually got a hold of that famous 2005 E&Y report? The story I heard was that E&P pulled the report within a day or two because of its horrible quality, not being muffed by the Chinese government like a lot of reporters assumed. From a source who had read it, it contained $200+ billion double counting right off the bat, and some assumptions were seemingly wild. Maybe it was pulled really because it was "ridiculous and barely understandable" (by the Chinese central bank), and "factually erroneous" (by E&Y themselves).

China: Why It Can't Be a Global Leader

PBoC is the central bank. BoC is a the 3rd largest commercial bank in the world by market cap after ICBC and CCB. Some of the data is dated. But overall you are right China is a relatively poor county at a per capita basis. If Yuan is to appreciate against US dollar from 1:6.8 to 1:3.5 (nearly double), sure the foreign currency holding would be worth less (in Yuan term), but the domestic assets would be worth more -- roads, bridges, factories, etc. Plus even your bottom 80% would have twice as much income (in dollar term). BTW, if that happens, which in my opinion quite likely, within the next 5 years or so, China may have a larger economy than the US (now $4.4 trillion vs. $14 trillion). For those who start punching numbers, just remember China has been under-reporting its real growth by having stealthy higher GDP deflator numbers.

The worldwide education stats are notoriously difficult to compare across borders, e.g. some include private funding and some don't, and some include local funding and some don't. The bottom line is as of now a 18-yo kid in China has some 30% of chance to have college education, and that number is pretty decent.

That People's Party bit is laughable. The last premier to shape up the SOEs, laid off 20 million, during the Asian economy crisis in the late 90s nevertheless. Like they won't let firms fail if that has long-term benefits.

China's Economy Isn't in the Same Boat as the 'Developed' World

You are the one who is not thinking this thru. Beyond what Richard has said, think about this:

In this environment, only the absolutely best financial assets can have buyers, at price levels that won't cause the sellers to puke their guts out. Look at AIG's attempt to sell AIA, supposedly its best asset. It's hopeless for the American tax payers to recoup the $180 billion or a sizable portion of it.

HSBC is arguably the best large Western bank standing (It hasn't taken in any government money yet, unlike JPM, WFC and GS). It's getting out of the US market, and even taking the pain of share issuing, while holding on to all its Chinese shares, and maintaining its Chinese staff level.

On Mar 03 11:04 AM User 360916 wrote:

> Now this is a truly disappointing statement: China is a 'potential
> outperformer'?
>
> What do Bank of America, UBS, RBS, American Express, Goldman Sachs,
> Allianz, etc have in common? They've have sold or plan to sell their
> hugely profitable stakes in Chinese banks.
>
> Bo, please do homework before making this kind of naive observation.
>

Why It's Not Too Late to Short China

Yes A-shares are expensive, and SSECI technically may have a way to go at the downside. But you aren't shorting SSECI with FXP. You are essentially shorting the 25 H-share stocks. They track a lot closer to HSI than SSECI.