Thursday, September 17, 2009 0 comments ++[ CLICK TO COMMENT ]++

One analyst forecasts a huge bubble in China...but not yet

Thanks to a link from Naked Capitalism, I ran across a blog entry quoting an analyst that foresees a massive bubble in China—one that surpasses the 1980's Japanese bubble. I actually don't share the analyst's outlook but am referencing it as a dissenting argument to my views.

The interesting thing to me is that the analyst suggests that China will enter a massive bubble after capital controls are removed. The thinking, obviously, is that foreign capital will flood into the country causing misallocations (don't forget that a bubble is a misallocation of resources.) This view goes against my view since I believe China may have already entered a bubble in real estate and manufacturing (the stock market may be a bubble too but I don't care about their stock market bubble since it is tiny and has little impact on anything.)

Another way to contrasting our views is as follows. People like me are bearish on China and staying away from it. The analyst's view, interestingly, would lead one to be bullish on China, even though he/she is calling for a massive bubble later some time in the future.

I think the foreign capital flow argument makes sense: large inflows do cause bubbles. But it requires developed capital markets and I don't think China is going to hit the 1980's Japan state for at least 15 or 20 years. Japan's capital markets were far more developed in the 80's—it was already a developed country whereas China is still a developing country—and hence absorbed capital far more easily. So, overall, I don't see capital flows being a culprit in any major bubbles in medium term.

There is one topic pertaining to China where I completely disagree with most in the mainstream. That topic is none other than the forecasted poor demographics of China. Many argue that China will stagnate in 30 to 50 years because elderly population will increase relative to working population. I believe that is not going to happen. I don't know if I said it on this blog but I have maintained that one of the worst atrocities carried out by China is its so-called one-child policy. Some argue that such a policy was needed to control over-population but, since I am libertarian-oriented, I clearly wouldn't agree with the state dictating private affairs of citizens. Even if people end up as poor, it is better for individuals to decide on their own than let some government official decide. In 50 years, I am sure it will be considered by Chinese to be one of the worst actions by their government (it will be on par with 1989 Tiananmen Square Incident.)

I think China will remove their one-child policy within 15 years. After the abolishment of such a policy, I think demographics won't be as bad for China. I wouldn't bet against China (or stay away from it) just because of apparently poor demographics; it's an easily-solvable problem.


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