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The China Bubble

The China Bubble
William Cate

Bubbles are good speculations. They are terrible long-term investments. If you sold your DotCom shares by March 2000, you did well. If you still own those shares, you are reading this article from the Poor House. If you cash out of the PRC before the Bubble bursts, you can watch the PRC economic failure from a safe haven. If you ride it to the end, you could find yourself little better off than many people in North Korea today.

Bubbles develop because there is a gulf between investor expectation and reality. As more investor lemmings jump into the investment, the gulf grows. Business decisions are made on perception. In time, the perception gulf is recognized and the bubble bursts. Currently, the American Media is questioning the perception gulf in U.S. Real Estate. In due course, the American Real Estate Bubble will burst. Eventually, economic reality will overtake the Chinese Economic illusion. You don't want to be invested or living in the PRC when this happens.

The People's Republic of China (PRC) phenomenal economic growth of the past decade came as a byproduct of an unlikely marriage between Capitalism and Maoist Communism. China's economy is based upon an "Export to the West" strategy. However, both the European Union and the United States are objecting to the tactics used to create a massive favorable PRC trade balance. This trade-based conflict of interest can only get worse over the next few years. As it grows worse, the PRC favorable trade balance will contract. In turn, this contraction will slowly reverse the PRC's economic growth curve.

Wedding Capitalism to Communism is dangerous. The expectation of Communism is that the wealth created by Capitalism will be equally distributed to the masses. The expectation of Capitalism is those who make the money will keep the money. The Beijing Government cannot distribute sufficient wealth to the countryside. The Government risks rebellion. Distributing the Capitalist wealth evenly in any country offers little financial benefit to the majority of citizens in that country. This share the wealth axiom applies equally to the United States as it does to the UK or PRC. So, the peasants will eventually conclude that Beijing has failed in keeping the promise of Communism. The peasants won't have two cars in every garage and a chicken in every pot. The reason is there aren't enough cars or chickens to meet the peasants' expectations.

China's development of hydroelectric energy has already reduced some major rivers to a dribble. The resulting reservoirs flood millions of hectares of peasant farmland. Beijing's environmental policies are based upon development at any cost. Eventually, the bill for those costs will become due. It can't be paid.

Political stability exists as long as the standard of living in any

country remains at least constant. The risk in a sharply raising standard of living for those directly benefiting from PRC Capitalism is that when their living standards fall, social unrest is certain to follow. I suspect PRC living standards will start to fall in the next few years.

Taiwan is a flash point. A decision by Taipei to declare independence would put the PRC into the untenable position of losing face or going to war. A loss of face would probable lead to the breakup of the PRC. For instance, there are 250 million PRC citizens who follow the teachings of Mohammed. Most want independence from the PRC. The PRC invaded Tibet and the Tibetans have consistently sought their independence. A war would quickly involve the United States, Japan and the European Union. Either response to Taiwan Independence ensures that the Chinese Economic Bubble would burst.

North Korea is a loose canon that threatens the region. The PRC is at far more risk of a North Korean nuclear attack than is generally acknowledged in the West. After all, when you are crazy and your friends turn away from you as your people starve, it's easy to blame your former friends for your woes.

Because of the PRC's export dependence, you should view the longevity of the PRC Bubble in the context of the strength of Western Economies. When the American Real Estate Bubble bursts, as the U.S. Media predicts, a Worldwide Recession will follow. Given that the Real Estate Market is based upon perceived value and the American Media are destroying the perception, the odds are the West should brace for a Recession in the next couple of years. A Western Recession will drastically reduce the PRC exports. It could be the needle that pricks the PRC Bubble.

If you are a PRC Capitalist or Taiwanese investor, there are some steps you should consider taking to protect yourself.
1. Take your PRC Company public in the West. You will convert your fixed PRC assets into liquid shares that can be converted into a free trading currency.
2. Move a percentage of your assets offshore. Doing so gives your family insurance should you find it necessary to flee the PRC or Taiwan.
3. Obtain a second passport.

This Bubble Bursting Defense is common sense. A trickle of PRC middle class families has adopted it. A larger number of Taiwanese family use it. You should be part of this trickle before it becomes a flood and the economic dam cracks and the bubble bursts.

It's your future and the fate of your family. Plan carefully or be swept aside by macroeconomics.

About the Author

He has been the Managing Director of Beowulf Investments [] since 1981 and is the Executive Director of the Global Village Investment Club []

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