Sunday, August 26, 2007 0 comments ++[ CLICK TO COMMENT ]++

China: It was the best of times, it was the worst of times...

I came across a bunch of articles on China and thought I should talk about China. What is happening in China now can be best described by Charles Dickens' opening for A Tale of Two Cities: "It was the best of times, it was the worst of times..."

Top Economic Power by 2100

China will become one of the top economic powers--likely #1--in about 100 years. In fact, some analysts expect China to play a bigger role in the world economy than any other country by 2050. The chart below is from an HSBC report, where they project China's (and India's) impact on the world.

(source: From Hero to Zero and Back Again, by Robert Prior-Wandesforde and Garry Evans; India Watch (Issue 15), Macro - India Economics & Strategy, HSBC Global Research; August 17, 2007)

The fact that some Asian countries like China and India will start playing a bigger role should not be a surprise from a super-long-term point of view. In 1700 of the of the last 2000 years, either China or India has had a bigger GDP than any other part of the world (these are just estimates but the chart above alludes to this point). However, unlike most analysts or economists on Wall Street, I do not think China (or India) will overtake USA within 50 years. A lot of analysts are projecting the high growths rates of the past 10 years far into the future. I don't think the high growth rates can be sustained so my view is that it may take 75 years to 100 years for China to overtake USA. And that's just on the raw GDP; if we look at GDP per capita, it will take even longer for China to catch up to USA's wealth levels.

A Visit by an Old Visitor

A journalist from The Economist recently visited China, after having studied there in the 70's. There are a couple of great articles you can find here. If you have some time to kill, check out the personal experience of the traveller. I find it quite enjoyable to read.

I think it is quite insightful of the author to observe the emergence of the Chinese art scene. Chinese artists are gaining more prominence in the rest of the world. Whether you look at paintings, or contemporary multimedia art installations, or films, I am starting to see their fingerprints. Being a movie fan, I am interested in some of the Chinese film directors such as Zhang Ke Jia (The World) and Kaige Chen (Farewell My Concubine).

Sacrifice Of the Present Generation

The reason I started off this post with the Dickens quote is because it is so similar to Industrialization of Britain. Along with the benefits, which really didn't show up until well afterwards for future generations, there was a lot of suffering and pain. I think present day China is quite similar. There are many things to look forward to, but there are also horrible things happening.

A Toronto Star article I read referred to 18 deaths in Chinese coals mines every day. Such things happen in other countries but it is on a much larger scale in China. A tragic loss of life that no one--including the workers--seem to care about.

"You see that?" the gangly miner asks, pointing to a pile of coal just a shovel-length away at an open-air restaurant in this gritty, hillside town 100 kilometres west of Beijing.

"That's what makes this town. It's why thousands of men come from all over China to work here."

It's why the brothers Meng – Xianchen and Xianyou – came all the way from Inner Mongolia.

It's also why they died.

Working at night in an illegal coal mine, without safety equipment, for less than $10 a day, they didn't make it out when the earth began to shudder last Saturday.

People living in wealthy countries will have a hard time understanding why people put up with these horrible conditions, but that is what desperation is. If you are poor and you can't find any other work, death is an afterthought.

"Frankly, accidents here are a common occurrence," said one. "But villagers here count on these mines.

"There are thousands in these hills. If the government wants to shut these down, it will put tens of thousands out of work. Everyone here depends on them."

No one disagreed.

To make matters worse, the coal that is used as China's primary source for electricity generation causes a lot of pollution. Future generations of Chinese need to remember the hard work--some of it good, some of it foolish--of the present citizens. Life has never been easier...

Investing in China

Having read all of the above, you might think I'm bullish on China. Not quite. I think China has very good potential in the long run, but it is going to face some big problems soon. There are too many bubbles in China right now. They range from overcapacity in manufacturing, to property bubbles, to a wild stock market bubble (similar to NASDAQ bubble but not as big in monetary value). The fact that there are capital controls pretty much means that small investors have very little chance of investing directly in Chinese stocks or bonds. The only bet is to invest in the Hong Kong market or to take indirect bets by purchasing companies that benefit from business in China. In any case, until these bubbles burst, I do not feel it is worthwhile to invest in China. But keep it on your watchlist of the future...

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