Tuesday, March 16, 2010

China = FAIL?

I've been thinking about things and I'm believe that China's economy is in a bubble. I don't know exactly when, but I'm predicting a bubble burst in the next 3 years.

Unfortunately, my economic prediction in 2007 that our economy was going to crash proved true. Again...I am not an economist, but I'm getting the same sense about China's economy.

Why would I make such a prediction when everyone else is saying China is the growth engine for the world's economy?

1. I don't disagree that China will become the world's largest economy over time. "Over time" to me means in the next 25 years.

2. This is China. Everything is China is not what it seems. You can't trust anyone that might have a financial motivation. All the economic data coming out of China comes from the government. Q: Do they have a financial motivation? A: Yes. Conclusion: You can't trust the #s.

3. There are 1.3 BILLION people in China. That is over 4x bigger than the US. China's government says it's unemployment rate is 4.2%. Again, this information comes from the government. So my guess is that unemployment is actually 3x that and is somewhere between 10-15%. China's working age population is around 900 million. Assume, conservatively, that half of those are looking for jobs and you get 45M-68M people looking for jobs. Uh oh.

4. All the shortcuts that is and have been happening in China over the past 20 years will catch up. Whether that is the health effects of pollution, unregulated and widespread food safety issues, poor worker conditions and pay, or low construction quality throughout the building boom...all of these elements point towards an evitable collapse. It's a house of cards that's been built to demonstrate the power of a Chinese economy.

China has built up a tremendous amount of intangible "debt" in the last 20 years. While even if the #s look good, at some point the government's command-and-control will be unable to juggle all the moving pieces and things will tumble.

And following this train of thought, a Chinese economic bubble burst is bad news for the rest of the world and especially for the US. China is the biggest loaner to the US government. Without China's ability to loan to the US, the US economy will grind to a halt (again).

Cross your fingers.

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Matt LeBaron said...

Hi Andrew,

Just found your blog. Interesting post about China.

Not sure if you're familiar with Stratfor (www.stratfor.com), a global intelligence firm, but they're forecasting something similar to you, for similar reasons. Check them out...you might find them interesting. I've been a subscriber for a couple years and find their analysis refreshingly independent and always thought provoking.

I look forward to reading more from you...!

Matt