Commentary & Analysis
“We are toast! China is going to kick out butts.” According to my neighbor fresh off his guided tour of the Red Dragon ...
It was kind of ironic, from the standpoint of my simple life, that my neighbor stopped by yesterday to give me some junk mail addressed to me, but put in his box. He had just returned home from China, so I think his visit was a chance to pontificate on his travels and newfound knowledge—he is a doctor after all and one with a minor God complex; but that said a good man, smart man, and nice guy once you understand genuflecting is required in order to converse with him.
The conversation went something like this [my thoughts in italics]:
Me: Hi Doc, how are you?
Doc: Fine thanks. Here is some of your mail that was left in my box.
Me: Thank you.
Doc: I just got back from my trip to China. Wow! We are toast. China is going to kick our butts!
Me: Well, I think they have already done a lot of kicking.
Doc: Yeah, but it’s an amazing place. They work harder than we do. No one is fat, like Americans [sadly I resemble that remark; the Doc is always telling me to lose weight in some form or fashion; he doesn’t have a Scotch diet like me and is quite fit]. They are amazing people. They love America.
Me: Oh really! They love America?
Doc: Yes, almost everyone we met was so nice. Our guide was a really nice guy; he was Chinese and had an MBA from University of Pittsburgh.
Me: So do you think you got a fair sampling of the real guy on the street? They didn’t seem so happy when I was there. Maybe it was me! [And it very well could have been.]
Doc: Oh yeah! We got to speak with anyone we wanted. I talked to the average guy everywhere we went [hmm…average Chinese guy speaks English? Is what I was thinking; sure wish I knew Chinese.] We went to a temple/garden and this old man who writes in Chinese characters [not sure there is another method in China] using a little water dipping tool spelled out “Hello” to me; it was so cool. He told me how much he loves America.
Me: Wow! Sounds great! [Thinking to myself what a wonderful job his handlers did.]
Doc: And you know what?
Doc: I didn’t see any sign of communism the whole time I was there. They are pure capitalists.
Me: Well, not sure I would go that far. There is still plenty of power at the top, and they are communist.
Doc: Maybe. You should have seen the buildings in Shanghai? Amazing! [There was that word again. And I can’t argue with that one, as China has constructed some great buildings indeed. I am thinking they just created about 10 million too many of them, that is the problem. The “average Chinese guy,” not Doc’s version, can’t afford to buy, as home prices-to-income ratio is a stunning 22:1 on average, and much higher than that in key cities. For comparison, at the peak of the US housing market, home prices-to-income in the US was around 6:1].
Me: Yes, they have some great buildings, but there is huge overcapacity—did you know that?
Doc: Oh yeah, sure! [He knows all…lol…my wife in fact has seen this in action and when I get done talking with the Doc out in the yard on occasion, my wife asks me, sarcastically: “So what did you learn about economics and finance from the good Doctor today?”]
Me: Well, an interesting stat that goes to the overbuilding problem, that I noticed, which is no surprise, except when you think of just how many people China has before you think about the stat, China has more cement production per capita than any other country in history!
Doc: I think America is in big trouble. They are going to crush us.
Me: Well, I think they are headed for a major economic bust before that happens. And if it does happen, the dynamics of the competition may change going forward. Do you remember what happened to Japan back in the late 1980s when their bubble burst?
Doc: Oh, yeah. [He had no clue; I could see it in his eyes.]
Me: …I just finished a major report on China [titled China: Danger, Red Dragon!
DANGER! – you can read about it here], where I outlined the parallel with Japan and explained that despite the awesome site China is now, for sure, they are headed for a major financial bust because they have over invested in all the stuff you saw on your trip. And because I don’t think China is as free as you think it is; the transition to a new economic model is going to be extremely difficult for them. The Princelings have a lot of power and don’t want change. There will be a lot of blowback!
Doc: Well, I better get back home. Jet lag! I need to sit down and rest. [No comment on my comments; guess my genuflecting was not up to snuff that day.]
Me: Take care Doc. I am glad you enjoyed your trip.
[Editor’s Note: I only provided slight embellishment here. And if you are reading this Doc, I still love and respect you despite our differing views on China.]
As I went back to staring into my FX screens, I was thinking about that conversation. I was wondering do I have it all wrong and does the Doc have it all right? I hear this type of thing from other people who have visited China -- in fact it is the norm. All good! All happy! All capitalist! Building cranes everywhere so the economy must be booming! And those terracotta soldiers ... it’s just amazing!
Well, I guess I view the world through a different set of lenses than most people. My wife would say through a curmudgeon lens, I would say through a skeptical lens. When so many people love something so much is when I automatically tend to shy away. I laid out my case as to why the Red Dragon isn’t wearing any clothes in my most recent China report. I hope it holds up to critical scrutiny. I think it does. And as they say, time will tell.
No doubt, betting against China, as I have done before, was a losing bet. It just seems this time the global macro tumblers seem to be clicking into place.