The Chinese Economy: A view from up-close.
This is a response to Jonathan Rochford's excellent article Opinion: This is why U.S. investors should be worried about China. In the following writing I attempt to back up his claims with some of my observations I had while living in Guangzhou, China.
"We should buy now!"
"Guangzhou will follow Shenzhen."
"My friend bought last year and now her place is worth so much more!"
Day to day from casual conversations, aggressive real estate agents and from endless buildings being built it is easy to ascertain that people in China spending way beyond their means, particularly when it comes to housing. This is very important given that construction is the largest industry in China (far larger than manufacturing) and housing is the primary investment.
Chinese are perhaps even more attached to housing as an asset class than any other country in the world. They are an extremely family oriented society with some unique characteristics. One of such is due to the longstanding one child policy there is a lack of women to men to the tune of 30 million; couple this with a cultural expectation that a man owns a house and a car before marriage leaves men looking towards shadow banking and massive leverage to get a piece of the Chinese dream. This is not to say that young women are not also playing the game as well.
And from their perspective, why shouldn't they take on debt? There is a whole generation who now has seen and experienced nothing but economic growth and values rise. They have never seen anyone lose from taking a risk and overextending themselves, rather the only hardship of note is the people who have missed the boat. Add this to standard bubble creating behaviour, and a close relationship between business and government that is far from transparent and you wind up with housing cost astronomically higher than average wages.
Indeed, in this article Canada and Australia are chosen as developed economies with similar debt loads, but I believe it should be explicitly mentioned that Canadian and Australian debt levels are essentially directly linked to Chinese investment in housing in their respective countries. As Chinese are willing to pour billions into this market, Canadians and Australians see path towards wealth and security is by leveraging up to afford homes in their countries whose prices are not justified by the wages found in the local job markets. So it is not so much that China is mirroring excessive debt practices of the west, but rather the fast asset value appreciation is steering these two countries in the same direction.
Finally, I would like to expand on the other point about the underdeveloped capital markets mentioned in this article. Chinese markets are far more driven by speculations of unsophisticated retail investors when compared to other more developed economies. I believe that market fluctuation are driven mostly by a Chinese love of game of chances and beliefs in lucky numbers mixed with a sense that Chinese government has control over everything. Thus given that most companies are linked with the government, the investors believe that they cannot lose because the government will not allow it. I would witness migrant workers shuffling to work all glued to their phones watching stock prices in crowded subways of Guangzhou and be reminded of Joe Kennedy's quote before exited in time to avoid the great stock market crash,
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
In short excellent article and my experiences bare witness to your analysis. In my opinion investors should watch the Chinese market closely as it has major effects on the global economy as a whole.