Caveat Emptor–China

For the past few years China and all things related to Chinese investments have been the rage on world markets and specifically the stock markets around the world.  We are all familiar with the emerging market trend and the BRICs.  There is no question that China is at the forefront of that enthusiasm.  Billions if not trillions have already been invested in the China play and numerous folks, 401 k’s and international companies have made lots of money off these investments.  But markets always look to the future.  Whither thou goest with the China play down the road?

It is true that China is building gobs of just about everything.  They are doing a new power plant many estimate at the rate of one a week.  Virtually all of them are coal powered at the moment even though they are building more nuclear facilities.  They just finished a few years ago the giant Three Gorges Dam project and are still building roads, highways and airports in a pell mell fashion.  Millions of their people are moving from the hinterlands to the cities and taking better paying positions in industry and production plants.   There is no doubt all that activity will and does now call for the purchase of enormous amounts of raw goods and materials and the import of heavy equipment to construct these facilities and infrastructure.

There are those who predict a continued growth in the China play as far as the eye can see.  They may be right.  They have certainly been right for the last 15 or so years.   There is the old investment adage about the “trend is your friend” and go along with it, don’t fight it.  The China trend has been on an upswing now for years.   Maybe it will continue unabated for generations.  It never hurts though to have a bit of rational reflection about future prospects for any particular company, industry or nation when investing your hard-earned dollars.

China is dependent on relative stable markets and conditions around the world for its continued growth.  This is true because it depends to a great extent on foreign imports of vital resources.   China imports oil, coal, iron ore, uranium, food stocks, and huge quantities of heavy machinery and equipment.  It has a modicum of raw materials but only that.  A cut off of oil for the US would be difficult and a real pain but for China it would be devastating.   Likewise it must have for the foreseeable future huge amounts of coal and iron ore and equipment to build all that infrastructure.   Will that flow of goods and materials remain stable for the next generation?  The Chinese have locked in many long-term agreements around the world for these supplies from Africa, the Mid-East and South America.  But local politics, revolutions and corruption could interfere with that flow at any time.   The Congo government might today agree to supply materials for years into the future but will that government be the same in seven years?  Does the history of Brazil indicate long term stability over decades?   Of the major economic powers China is very dependent and lacks self-sufficiency in many vital areas.  The Japanese made it work for several decades but how have they been doing the last 20 years?

Things change. We all know that but many today assume that matters won’t change in China as far as the eye can see.  Certainly things change when it comes to economic affairs.  China is already feeling the pangs of inflation and is under pressure regarding the value of the yuan.   Their workers are becoming a little restless and more assertive according to all  reports.  Their low wage structure is critical to their continued success with exports.  That is the biggest factor in their competitive edge.  But workers in Indonesia, India  and other area will undercut those wage costs and are already beginning to do so.   It is always a terrible business mistake to assume that matters won’t change but it is human nature to often assume that matters will be the same five years from now as they are today.  In 2006 everyone was still  assuming that housing prices would go up, and only up.  This was especially true in the “hot” areas of the country.  How was that theory working out by late 2008?

Lastly, China is not an open or free society.  We don’t talk about that much these days.  Everything is still under the domination of the Communist Party.  Recently, if you keep up with the news on the back pages, you will have noted that some in the Party are beginning to rebel against market economics in China.   They are even proposing that professionals be forced to go back and work on the collective farms for a period of time.  The “Arab Spring” is causing upheaval in the Mid-East.  Will there be a real Jasmine Revolution in China that brings significant political changes?  It wouldn’t come with the Party handing over control voluntarily that is for sure.  The Party has an iron grip on the military from top to bottom.   Remember the recent public exposure of the new stealth fighter jet when the Premier was hobnobbing with our guy and he didn’t even know about it; at least that was the story and they were sticking to it.   If the Party gets more aggressive then the economy there will suffer.  If the Party were to ever be overthrown then there would be certain turmoil that would last for years, a la Eastern Europe after the fall of the USSR. 

So the trend is good now and there is probably money to be made investing there for the moment.  That moment may be brief and I sure wouldn’t bet my retirement money on that trend continuing uninterrupted for a generation.

“Communism is not love.  Communism is a hammer which we use to crush the enemy”.  Mao  www.olcranky.wordpress.com

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