July 16, 2012 at 9:25 am #17612
Posted on behalf of Chris Hunter
Some analysts claim that China’s often poor returns on capital investment don’t matter because the country treats capital differently to other economies. Are they right? Is China really exceptional? Or is it in danger of going the way Japan went in the early 1990s – toward a massive crash in asset prices and a multi-decade slowdown in growth?
July 16, 2012 at 6:25 pm #27253
- This topic was modified 5 years, 6 months ago by Web Admin.
My thinking is that China is not immune from the forces of the free market. To think otherwise would be to suggest that China is also immune from the forces of Mother Nature. And, as with anyone who interferes with the free mkt, China will utlimately pay a price, just as the US is still paying a price for subsidizing the housing and lending markets. (After all, it is not nice to fool with Mother Nature. She might take offense.) A corrolary would be that the more one interferes, the higher price one must pay. Just as in the States, Chinese politicos are paranoid about losing power; and likely Chinese officials are even more paranoid b/c their removal might be a bit more, um, physical than the removal via ballot box employed in the States. Also Note: Govts arguably check candidates for paranoi before they take office, and, any applicant who is not paranoid is promptly made so. 😉 Hence, in China, the temptation to interfere and the amount of interference may be greater than anywhere. Finally, if Chinese leaders have interfered the most, then we can expect China to pay the highest price of all. The more one fools with Mother Nature, the more offended she is apt to become.July 16, 2012 at 7:31 pm #27254
To begin with there is no such thing as “Free Markets.” All markets are manipulated. whether in the USA or China. It is how you adapt that counts. Second, Deng Xiaoping, once a victim of the Cultural Revolution, but reinstated to save the country from failed economic policies of Mao, instituted limited capitalism in selected industry sectors, while holding to an unelected elite-educated central government. You have to grasp not only the history of China going back to the Xia Dynasty, but it’s the language structure which shapes a culture and perceptions of reality. Trying to impose western history, culture and language framework to China or any non Greek-based culture/language is arrogance at best. Third, the power center of China is not Beijing, but in the provinces. As the ancient saying goes; “the mountains are high and the emperor is far away.” True thousands of years ago, true today. Fouth, I spent many years doing joint ventures in China, in the transition period from state-controlled to private ownership. They are a patient culture, making decisions that may impact their families 100 years down the line. Economically, they are more in line with Bonner-Partners philosophy than what respresents western capitalism; long-term value over short-term ROI. I have no doubt the B-P approach will transcend generationally the economics de jour as will China. Don’t bet against a culture that has survived and adapted for over 4,000 years.July 16, 2012 at 8:02 pm #27255
Still, let’s not forget that, as Shakepeare said: “Love knoweth not rank nor river bank.” Similarly, the free market knoweth not language, cuisine, or culture, and it tends to ignore whether the Pacific Ocean laps up against a nation’s west coast or its east, or whether its governing elites are educated in Boston or Beijeng. The market, be it of the micro or macro variety, is a natural phenom that, when subjected to unnatural manipulation, reacts in a natural manner do to reinstate the natural order of things. This go round, before it has finished reacting, it may inspire the replacement of elites around the globe.July 18, 2012 at 4:08 am #17969
China has been exceptional in their energetic evolution recently, but they are no different from Japan in the long run.
China is not an independent economy. It it were, it may have had more control over its evolution. Instead its export model economy is working in lock step with the masters of the universe, the central bankers and the politicians of the US and EU. The combination looks like chop suey, stirred up to look like a dog’s dinner. It is a mess. Keynesian concepts have run amok, favoring consumers and profligacy at the expense of savers and capital accumulation. Current fashionable practices are a distortion of the ideas Lord Keynes proposed in his smaller, closed system. These distortions have put the whole world out of balance.
In the very long run, when we are dead, China may equal the US in economic power… or they may just use their excess males and new weaponry to make war and set themselves back a few decades in an attempt to avoid internal “disturbances”. Lowering the expectations of their population is a tricky task, although the princelings are not sentimental about “putting down” trouble. Whatever the case, the world still has some reckoning ahead, dealing with excess debt. This is not the usual boom and bust cycle.
The US has slowed its buying of Chinese manufactured goods, except for gaudy Olympians clothing. The US buyers are fresh out of credit and are sick at the thought of taking on more debt to buy households of imports which will soon be in the dump. Even if beaten with a stick, consumers won’t take any more money now that they think they might have to actually pay it back. That is the problem for the Feds with their QE antics. Nobody wants the money, at least in the productive sector.
The US slow down is making trouble for China. They in turn buy less expensive German stuff for their “development”. So the third leg of the triumvirate (US, China, EU), Germany as the powerhouse in the EU, is facing problems too. In addition, Germany has problems with the credit they pushed on the other countries of their captive market in the EU.
There are huge imbalances between the US, China and the EU and then within the EU there are internal imbalances.
I don’t see how this can hold out against the natural forces of the market. Both Europe and China are headed for more difficult times. I think Europe may blow up first as there is so much seething discontent. The Middle East uprisings are a prelude to what may happen in Europe.
Unwinding the debt could take a few more years. In that time there could be many surprises, but I think the US will be the best of the bad bunch in five years. Both China and Europe look very precarious and dangerous to me.
I don’t see the “emerging markets” as being a refuge.
The US bond market is the only place to hide for big money accounts, although it looks more like a risk bid than a safe haven at the moment with expectations of more monetising. The Fed’s are determined to push rates to zero so the liabilities of the US Govt, like defense and social services, are reduced in cost. Taking inflation into account, bond holders are paying, interest minus inflation, to keep their money in US bonds because it is safer than the stock market or any other market. The world market is still bigger and more powerful than the central banks so this is a short term situation.
Right now, the scandal of the LIBOR fixing looks very serious to me. Depending on how the courts judge the banks in the actions developing, this could be a bigger hit than the mortgage scandal of a few years ago. The marginal effect to the world economy from the G20 big banks corruption and further losses could be the next surprise.
For small money investors like us, small relative to banks, I still think US$ cash is the safest place for us. Gold will be sold to pay off debts. In time, there will be bargains for those of us who have any money left. For example, Bill’s real estate idea could get much better when both prices and interest rates are 30% lower. He may have been saved by the enthusiasm of buyers thinking this is the bottom.
We are of course counting on you guys to get the details right for the long term family investments. We’re not in a hurry. Just get it right. J
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