No doubt China is a great country and civilization with a history going back to several millenniums comparable to India, Egypt, Mesopotamia, etc. However, recently, China is hitting headlines for some wrong reasons. (I am not sure my colleague who is of Chinese origin, but an UK Citizen, will agree with my view. He often argues that China is hitting the headlines for all right reasons.)
As China made its massive population the cheapest hardworking labour in the world, the greedy corporates of USA decided to dump the blue collar labour in their own country and exported those jobs to China. This still is one of the core reasons for record US unemployment, highest in the recent history of USA. Chinese labourers are working in poor labour (near slavery?) conditions and humanitarian track record of China is among the worst in the world. However these issues do not bother US Corporates, if money can be made cheap. Remember the recent news of suicides in several Chinese factories.
Cheap (and often stated to be of low quality) Chinese goods are flooding global markets and have created havoc in many countries resulting in closure of several industries in those countries. Recently, China won and half completed a metro railway project in Saudi Arabia undercutting several other competitors. It is reported that China is losing money in this project but happy and it means that they have now taken the undercutting abroad.
Both Saudi and China are totalitarian regimes and intolerant. One is based on communism and doesn't like religion and claims there is no God. Another one is based on extreme form of religion and insists that their way of viewing God is the only right way. It is a paradox that Saudi relies on skill set of expatriates of different religions such as Hindus, Christians, Parsis, Buddhists, Jains, etc but no religious freedom. Saudi beheads its criminals and does not allow women to drive or has any theatres. Saudi follows their religious law and restricts freedom of speech and expression, which has similarities to Chinese communism, where also both are denied. A chinese citizen -Liu Xiaobo- was awarded 2010 Nobel Peace Prize but he is in prision for the criminal offence of working for fundamental human rights in China. Whilst violent 'Communism' was exported all over the world by Soviet Union in early 20th century, now-a-days it is violent religious 'Terrorism' that is being exported around.
Now the million dollar question is whether Chinese Property Bubble will burst in 2011. It is widely acknowledged that the Property Bubble in China is much worse than that of US in 2007/08. The average price to rent ratio in China now stands at 40x vs. 23x of USA just before the onset of 2008 crisis. The main reason is that the government owned companies / banks driving up the investments to support GDP growth, even during the financial crisis. Artificially suppressed exchange rates also contributed to the growth of Great Chinese Bubble.
As in the Japan of 1990 and USA in 2008, the Chinese banks have exposure to the property market and any crash will then will result in banking crisis. A banking crisis will soon turn into a credit crisis and then economic crisis. So, if the Chinese property bubble bursts, definitely the global problems would multiply.
However, there are many who dismiss the above views saying China is different and they can control these issues. Well, that is what I also want so that the predictable 2011 is good for investing. My portfolio would not show much fluctuations and that is good. However, it is worrying that such complacency was exhibited prior to the United States sub-prime crisis and European sovereign debt crisis as well.
If China Property Bubble bursts the initial casualty will be drying up of demand for Raw materials. China is currently the global leader in consuming major commodities such as copper, steel, cement, etc. As the commodities take the southward direction, the mining companies and mining equipment manufacturers would follow. Investor sentiment would be affected and the global stock markets may test new lows. Bears would be happiest persons.
Let us hope that as China lovers say that the Chinese government has "ample resources" to bail out its banks and other sectors, in case of a crisis, which would prevent any exacerbation of the problem.
Wednesday, December 29, 2010
Saturday, December 11, 2010
Will 2012 be similar to 1932? Or Japan in 1990s ? - Part 2
This is in continuation of the article published (in this blog) couple of weeks ago titled "Will 2012 be similar to 1932? Japan in 1990s?" We discussed about the parallels between 1929 Crash and 2009 Crash and discussed some of the common reasons behind both downturns i.e. - the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc were some of them.
We had also discussed about the parallels of 2009 Crash to the Collapse of Japanese economy after their fantastic economic growth in the 1970s and 1980s, where Japan witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy. But mainly due to mismanagement of the interest policy regime, the stock market crashed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt, which sound so similar to the US story of 2008 end/early 2009.
What did Japan do during the 1990s after the gigantic economic shock? Among the steps by Japan, zero interest rate regime was the most famous to create demand. But deflation set in Japan creating lot more problems. Stock market index (Nikkei) that touched 38,957 in Dec 1989 is still hovering around 9000 levels today. The real estate prices are now going at the fraction of bubble times. Why did the deflation set in the Japan? Many reasons are highlighted by various authorities.
a) Sharp drop in post bubble asset prices. It is partly emotional. After burning the fingers in the crash, many investors (including retail investors) won't touch the same asset class and may even warn their children.
b) Risk averse banks: Post bubble, many banks were literally destroyed by the large percentage "non-performing" credit assets(i.e.loans that had to be written off). This reduced the credit risk appetite of banks.
c) Businessmen, who recently experienced the trauma of economic collapse and witnessed drying up of demand and non-payment by debtors did not take risky decisions. They were reluctant to borrow and expand questioning whether the hard pressed consumers will buy more.
d) Japanese people became fearful of banks' collapse. They bought gold or invested in United States/Japanese Treasury securities instead of bank deposits, reducing the funds available with banks.
A university professor at Tokyo University in a recent research of young adults stated that "the lost decade made young people timid and afraid of what to do; it is made them even more risk averse". It is not good news for Japanese, who are famous for their hard work and astonishing growth from the shambles of Second World War.
Against this background, it is understandable why Ben Bernanke is pumping money into the US Economy through Quantitative Easing. Deflation should never be allowed to lift its ugly head. Deflation was the major problem in post 1929 crash also. As we mentioned earlier in this blog, the Governor of the Fed had studied the 1929 US depression (and got PhD). Those days the dollar was pegged to gold. Because of this peg, the Fed in 1920s couldn’t just print dollars to counter deflation. Thank God, there are no more gold standards out there.
Let us hope USA won’t witness a lost decade. USA has a more dynamic economy than Japan with greater employment mobility and entrepreneurial energy. The working age of Americans is not shrinking unlike Japan. Moreover, USA has sprung back from its previous recessions since the Second World War smartly because its free economy allowed the economic agents greater flexibility to cut costs or lay off or recruit resources. Let us hope this dynamism will ensure that there is no lost decade for the USA, which will benefit the world, since US is still the biggest economic player in the world. Let us also hope China will not play a spoil sport in this great recovery game.
What this mean to you and me? Well Be on Guard. Your hard earned money is always at risk of a possible economic upheaval. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. As you know, it is not an easy job; but very little alternatives.
We had also discussed about the parallels of 2009 Crash to the Collapse of Japanese economy after their fantastic economic growth in the 1970s and 1980s, where Japan witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy. But mainly due to mismanagement of the interest policy regime, the stock market crashed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt, which sound so similar to the US story of 2008 end/early 2009.
What did Japan do during the 1990s after the gigantic economic shock? Among the steps by Japan, zero interest rate regime was the most famous to create demand. But deflation set in Japan creating lot more problems. Stock market index (Nikkei) that touched 38,957 in Dec 1989 is still hovering around 9000 levels today. The real estate prices are now going at the fraction of bubble times. Why did the deflation set in the Japan? Many reasons are highlighted by various authorities.
a) Sharp drop in post bubble asset prices. It is partly emotional. After burning the fingers in the crash, many investors (including retail investors) won't touch the same asset class and may even warn their children.
b) Risk averse banks: Post bubble, many banks were literally destroyed by the large percentage "non-performing" credit assets(i.e.loans that had to be written off). This reduced the credit risk appetite of banks.
c) Businessmen, who recently experienced the trauma of economic collapse and witnessed drying up of demand and non-payment by debtors did not take risky decisions. They were reluctant to borrow and expand questioning whether the hard pressed consumers will buy more.
d) Japanese people became fearful of banks' collapse. They bought gold or invested in United States/Japanese Treasury securities instead of bank deposits, reducing the funds available with banks.
A university professor at Tokyo University in a recent research of young adults stated that "the lost decade made young people timid and afraid of what to do; it is made them even more risk averse". It is not good news for Japanese, who are famous for their hard work and astonishing growth from the shambles of Second World War.
Against this background, it is understandable why Ben Bernanke is pumping money into the US Economy through Quantitative Easing. Deflation should never be allowed to lift its ugly head. Deflation was the major problem in post 1929 crash also. As we mentioned earlier in this blog, the Governor of the Fed had studied the 1929 US depression (and got PhD). Those days the dollar was pegged to gold. Because of this peg, the Fed in 1920s couldn’t just print dollars to counter deflation. Thank God, there are no more gold standards out there.
Let us hope USA won’t witness a lost decade. USA has a more dynamic economy than Japan with greater employment mobility and entrepreneurial energy. The working age of Americans is not shrinking unlike Japan. Moreover, USA has sprung back from its previous recessions since the Second World War smartly because its free economy allowed the economic agents greater flexibility to cut costs or lay off or recruit resources. Let us hope this dynamism will ensure that there is no lost decade for the USA, which will benefit the world, since US is still the biggest economic player in the world. Let us also hope China will not play a spoil sport in this great recovery game.
What this mean to you and me? Well Be on Guard. Your hard earned money is always at risk of a possible economic upheaval. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. As you know, it is not an easy job; but very little alternatives.
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