Investors and analysts worry about a financial meltdown like the one that slammed the US and other developed nations. But Chinese leaders have other, more pressing problems.
I think investors are worried about the wrong kind of crisis in China.
Worry seems to focus on the possibility of an asset bubble and the chance that it will burst sometime in the next two to three months.
I'm more concerned about a slide into a crisis that will be an extension of the Great Recession. That slide could begin, I estimate, sometime in the next 12 to 18 months.
I understand the worry about the possibility of an asset bubble in China. After all, we've just been through two horrible asset bubbles -- and busts -- in the U.S. and global financial markets. And a Chinese bubble is a distinct possibility, one that should certainly figure into your investing strategy.
But China's economy and political system are so different from ours in the U.S. and those in the rest of the developed world -- and its relationship to the global financial market so unique -- that I don't think we're headed toward any kind of replay of March 2000 or October 2007.
A bigger worry is a long-term slide into a lower-growth or no-growth world in which nations strive to beggar their neighbors and all portfolios slump. As crises go, it's very different but ultimately just as painful for investors as the asset bubbles that draw all our attention now.
To paraphrase Leo Tolstoy in "Anna Karenina": Happy bull markets are all alike; every unhappy bear market is unhappy in its own way.More from MSN Money and MoneyShow.comAn explosion in China's money supplyNo end to the war with banksAnarchy in the UK (and the US, too)?Jubak on video: Google writes off ChinaHow Iraq is squeezing out Big OilJubak on video: Will China really slow growth?Toil and trouble Most analyses of China's economic troubles begin, rightly, with the river of money flowing into the nation's economy.
How deep is that river?
Start with the $585 billion in official stimulus spending. Add in bank lending that more than doubled, to $1.4 trillion, in the first 11 months of 2009 from $615 billion in all of 2008. And factor in continued runaway lending of $88 billion in the first week of January. If that rate were to continue, China's banks would wind up lending 50% more in January 2010 than they did in the first month of 2009.
All this has led to an explosion in the country's money supply. Money supply as measured by M1 was up 35% in December from 12 months earlier.
All that money has to go somewhere. Some of it has gone into productive loans or government-financed capital projects. But, clearly, huge amounts have been siphoned off -- in ways that China's politically connected capitalists know how to do so well -- into speculation in real estate and the stock market.
This has led to the enormous price increases for those assets that have stoked fears of a 2007-style financial-asset bust.
At its 2007 peak, the Shanghai A-share index (A-shares are priced in renminbi and can be purchased only by domestic investors) traded at seven times book value. At its high in the 1990s, Japan's Nikkei 225 ($N225) traded at only five times book value. Right now, the U.S. Standard & Poor's 500 Index ($INX) trades at 3.5 times book value.
The bubble is even more apparent in real estate. According to figures in a Financial Times column by Peter Tasker, a Tokyo analyst for Arcus Research, the Tokyo real-estate bubble of 20 years ago peaked with apartment prices at 12 to 15 times average household income. In major Chinese cities now, the comparable price for an apartment is 15 to 20 times average household income.
When real-estate speculation exceeds that of the Japanese real-estate bubble, investors are right to worry. And that's why even some minor saber rattling, such as the increase in reserve requirements by the People's Bank of China on Tuesday, is enough to rattle China's stock markets and developing markets around the world.
If you own Chinese stocks or Chinese real estate, you should worry about the bursting of this bubble. It could easily take prices of Chinese stocks down 20% or more. After all, the Shanghai market fell 21% between July 31 and Aug. 31 last year. That was in the middle of the huge rally in global markets.
This is why I'm hesitant to buy into the Chinese stock market now. For my strategy on how to buy emerging-market stocks now, see my Jan. 7 blog post.
Continued: Central planning, with benefits
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After all, America is still the Best to invest in for a long term. We facing a train wreck and survive. Now America needs clean house, reform, and build a stronger foundations for the next generation. Recovery will take time. Growth is not ready yet until we complete our transformation.
Our Next Generation Leadership will be much better. The pain is still fresh and we need to support our government.
God Bless America.
Recently you seem to be more interested in Global trends than stocks. I read you articles to learn about your insights into stock not stock markets or countries. Only a fool will beleive company accounting in a command economy like China. It is an incomprehensible black hole.
I am working and living in China for last 7 months and have learned that what we think we know about this country is shaped by articles like this.
My eyes have been opened opportunities abound here,The demand is high here and the the people are happy, industrious.
Young people are highly educated and speak english very well.
They have seen thier parents and grand parents lives and quality of living improve steadily here.
The government here uses the west as the model and things are moving slow but improving every day. Cities and roads are growing at amazing rates.The infrastructure iand transportation systems are impressive to say the least.
Nothing is wasted here solar energy and battery operated scooters are every where.
I am investing heavily in this country contrary to what I would have done with my money before I lived here.
I've been to China about 40 times since my first trip in 1985, and believe the combination of high skill levels, ability to effectively employ advanced technologies, and increasing sophistication on the part of the government in long-term planning, combined with strong elements of the free-market in the economy, strongly suggest China will continue to be the place to invest, contrary to repeated forecasts of a major crash. Of course all economies hit road bumps, but the underlying strength and size of the Chinese economy suggest continued profits to be made from judicious investment in China, such as through mutual funds like Matthews funds.
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