One of the reasons people believe the “worst is behind us” is because the Chinese economy seems to be growing.
This from the Financial Times:
“Perhaps more than any major economy, China is showing signs of improvement, writes Geoff Dyer. Indicators suggest that the economy began to recover in March with industrial production rising 8.3 per cent from 2.8 per cent in January-February.
“But could it all be a bit of false hope? Could we, in fact, be misinterpreting a temporary stimulus-induced economic pick-me-up as an actual sustainable recovery?”
China says it is growing. But if it were really growing it would be using more fuel and more electricity. Instead, industrial demand for gasoil, used by factories and commercial plants, fell 12.6% in the first quarter.
Our old friend Sean Corrigan, chief investment strategist over at Diapason Commodities, also points out that electricity generation has been going down too. The last seven months’ power output has been 8.5% below that of a year ago.
Another old friend, Jim Rogers, believes China – along with commodities – is still the best place for your money. He may be right. But we don’t speak Chinese…and we fear the Chinese market may be subject to more risks than is popularly understood.
One of the risks we think is especially understated for China is the risk of central planning. Investors tend to favor China – over, say, India – because they think the Chinese government – even in the hands of communists – is capable of guiding the economy to prosperity. That is, in China’s case, they believe central planning is a plus and pay a premium for it. But central planning is always a mistake as near as we can tell. It is only not a problem when it is carried out so clumsily that it is ineffective.
“China’s head honchos tout a rosier future for the ‘Red Dragon’ economy than seems possible,” says The Richebächer Letter’s Rob Parenteau. “Over 15,000 factories in the Chinese provinces of Shenzhen, Guangzhou, or Dongguan have already shut down… with many more slated to close over the months ahead.
“It’s an epidemic that’s happening all across Asia, though you might not be hearing about the full scale of their meltdown on the evening news.
‘Half of China’s toy factories have shut down. In fact, at least 67,000 factories overall closed in the last six months of 2008. With another 60,000 factories in the Wen Zhou Province alone about to shut down.
“As many as 27 million Chinese are already out of work – with 20 million of them streaming out of the cities and back to the abandoned farms of the Chinese countryside.”
Remember the 1980s? Then, too, investors were willing to pay a premium for central planning. Then, it was Japan that was doing the planning. Investors sold U.S. stocks – on the theory that the United States couldn’t get its act together – and bought Japanese stocks, because MITI, the Japanese bureaucracy in charge of economic planning, was supposed to be doing such a fine job of guiding the country to eternal success. It didn’t seem to bother them that this same agency had advised Japanese carmakers to stay at home and not try to penetrate the U.S. auto market.
Of course, in 1989, the Japanese market…and its economy…cracked. Then, the Japanese turned their central planning skills to the task of avoiding the kind of creative destruction that capitalism had in store for them. In this they were more successful – preventing the necessary restructuring for the next 20 years. Brain dead banks were kept alive. Zombie companies remained in business. And an amount of money equal to more than an entire year’s total output of all the Japanese people was spent in futile ‘stimulus’ efforts. Today, Japanese stocks are still selling for 75% less than they were in 1989. Japanese property, too, is only worth about a quarter of what it was worth at the top of the boom.
for Markets and Money