For the past fifteen years or so, we’ve been reading about how China was destined to take over the world.
China had the highest GDP growth of around 10% a year for more than three decades…
It had the most people, including 92 million citizens with the surname Wang.
The country produced the most scientists.
It had the biggest market; every Chinese person was going to buy a PC, car, or watch.
China uses the most fuel and has the most construction cranes.
China imports and exports more products than any other country, and had a GDP of $7.5 trillion in 2010, second to the U.S.
But an ill wind has blown in of late…
As you can see by the chart of the Shanghai Index, the market doesn’t expect China’s dominant growth trend of the last 30 years to continue.
Almost any bet on China over the last five years would have cost you money.
After the 2008 financial crisis, the Chinese ramped up stimulus spending ($586 billion) and cut rates. This nearly doubled the market, but didn’t come close to hitting new highs…
The Shanghai Index has since rolled over and sold off.
No one expects the United States and Europe will save them. There is too much debt to support Chinese exports now. Even the New York and London carpetbaggers are slinking out of town.
According to Bloomberg, foreign investment in China fell 10 percent in November.
This is because China’s biggest export market is the European Union, and the EU is in rough shape.
Keeping Up with the Wangs
To combat these problems, the Chinese government has tried to develop a consumer culture in its own country.
It wants the average Liu and Chen to buy shiny things like Americans do.
There is room for growth because in 2010, business investment was 50% of the GDP. In most developed countries, consumer spending represents two-thirds of the economy.
The problem is that China makes stuff… but it doesn’t buy stuff.
This is changing — but too slowly.
As the Economic Times wrote recently, “Despite the double-digit growth in retail sales, partly because it is coming from a low base, spending remains too low to make up for the demand lost from the no longer free-spending American baby boomers.”
Real Estate Crash
Falling demand could help explain why the Chinese real estate bubble found a pin.
New home sales in Shanghai totaled 98,000 square meters at an average price of ¥24,121 per square meter in the week through December 11, 2011 — down 34.3% and up 24% respectively from the previous week.
Eleven of China’s 30 largest cities saw residential property sales decline this month. This comes after years of booming.
Take a look at this chart from Business Insider:
In addition to falling demand, China has also had trouble with inflation. This has caused the Central Bank to reduce the money supply.
This has let some of the air out of the housing bubble (M2 money supply fell 12.7% in November).
The Central Bank has recently reversed course, and is now flipping back to easing.
You Can’t Bank on It
Central banks have a long history of creating bubbles and mismanaging the recessions that follow.
I don’t expect that the brain trust in the Middle Kingdom will do any better than the ones in Japan or the United States.
The Shanghai Index is in a clear downtrend. It has fallen 33 percent for the year, and is off 60 percent from the peak. It looks like the NASDAQ circa 2004.
China was the hot investment for decades. Every investor has put money there at some point. And in markets where every buyer must have a seller, that defines the top.
I think it was Warren Buffett who said when the tide goes out, you discover who is wearing a bathing suit.
I expect there will be a lot of naked swimmers in the East China Sea…