China is Outpacing Europe and the US but its Economy is a Bubble

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Boom, Baby, Boom…

What’s going on in China?

That’s what we’ve come here to find out. We paid a visit to China 25 years ago and haven’t been back since. More on China in just a minute…

Let’s look at what is going on in the West, first.

Yesterday, the Dow rose slightly – after taking a beating last week. Gold settled at $1,228.

Dear Readers are out of stocks. So we’re not particularly worried. But we’re deeply interested. Has the bear market/Great Correction resumed – as we said it would? Or is this just more ‘noise’ – with no particular meaning?

We don’t know. But we intend to be in cash and gold when we find out.

Back to the Middle Kingdom…

First impression: this is not the same country it was a quarter of a century ago. The last time we were here there were almost no private cars. Everyone dressed in drab grey outfits and rode bicycles. There were no shiny new buildings. There were almost no restaurants. And if you saw a truck, it was likely to be broken down beside the road, with a couple legs sticking out from beneath it.

Second impression: wow! So many daring new buildings…such broad streets…so many construction cranes…so many fancy cars…so many electric bicycles…

..there is no doubt that China is far outpacing Europe and the US in many respects…that the 21st century will be defined by what happens here, not what happens in the West.

Third impression: China is in trouble.

“Stocks dive on housing fears,” says the headline at China Daily.

The Shanghai Composite index suffered its biggest drop of the year yesterday – down 5% after losing 20% since January.

According to the papers, the market has been spooked by the government’s efforts to restrain real estate speculation. The Chinese have a lot of money. And Chinese investors have relatively few places to put it. They tend to buy real estate…or stocks. This has pushed up property prices by as much as 100% in some areas, over the last 12 months. And it has caused the government to worry about a bubble.

Is the Chinese economy a bubble? Most likely – yes. Will it blow up? Again, most likely, yes. In fact, it seems to be blowing up right now. After leading the world in the bounce phase, it now may be leading the world in a return of the Great Correction.

In a nutshell – China’s economy is unbalanced…with far too much weight given to exports. Typical of successful export-oriented Asian economies, it has built too much capacity.

The last big economy to run into this problem was Japan. After the big boom of the ’80s, Japan had too many factories…and too much capital invested in the export sector. When the stock market realized it, a big sell-off began. That bear market lasted at least until 2009 – 19 years. For all we know, it’s still not over.

Stock markets are always discovering what things are really worth. Right now, they’re realizing that China’s companies are not worth quite as much as they thought a few weeks ago.

Will the sell-off continue? We don’t know. But most likely – yes. Because a big boom is typically followed by a big bust.

But wait a minute. How can we reconcile Impression #2 with Impression #3? How can China be the country of the future and still face a big financial upheaval?

Well, that is the future!

Much the same thing happened in the US after 1929. The US faced a tough period of adjustment – made worse by the efforts of the Hoover and Roosevelt administrations. Instead of letting the problem take care of itself – as they did during the 19th century – the feds intervened heavily. In effect, they were trying to keep the future from happening.

You can slow the future… You can make it more painful. You can drag your feet and shut your eyes…but the future is going to happen, whether you like it or not.

As it came about, the future for the US was bright. It just had to live through the Great Depression and WWII first.

China must be facing its own tests and challenges. Maybe they will be political. Maybe they will be only economic. But they are bound to be monumental…

And the events in Thailand show us how they can be bloody too.

“Thai street battles escalate,” says today’s Financial Times.

As of this morning, 29 people have died. More than 230 have been hurt. And a quarter of the country is locked down in a ‘state of emergency.’

Thailand’s troubles look less and less like street protests and more and more like a civil war. Who’s right? Who’s wrong? Who are the good guys? Who are the bad guys?

Who knows? As in most civil wars, it’s probably a shame that both sides can’t lose.

But it shows what can happen….

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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72 Comments on "China is Outpacing Europe and the US but its Economy is a Bubble"

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Realist
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Yes Bill, i think the world has no idea about China other than they are the engine room and they are important to our economies but there is a veil of ignorance attached to the reasons why. Admittedly i am under this veil but i did watch a very interesting program on an Australian program called foreign correspondent that interviewed a manager of a government owned ship yard and then interviewed what we would consider villagers or the blue collar workers and both situations were quite disturbing. The ship yard manager said he had gotten instructions from the government to… Read more »
Realist
Guest
Our yes, and i neglected the fact that the link to Australia was quite profound, the ships that are not sold are being used by the government to pick up iron ore from Australia. So it was literally a matter of building the ship sending to OZ to pick up the Iron ore, build another ship and then send it to Australia to pick up the iron ore and so on and so forth. They also mentioned that these ships are bringing is a surplus of iron ore on a scale so large it has a stock pile of 60-80… Read more »
Biker Pete
Guest

“These ships are running flat out to bring in more steel than they can even use at a break neck speed.”

You mean they’re _steeling_ it, Minn?
(Sound of panting tramp steamer jogging and breaking-neck in the background.)

Steve
Guest

I’m an American, but it seems to me that the Aussie economy is highly levered to the boom in China. When China goes poof, and commodity trading volumes and prices fall, how bad will the fallout be for Australia? How quickly will the RBA move from a tightening stance to neutral to cutting rates?

Biker Pete
Guest

Probably two months, Steve. How quickly did your rates drop when the US went poof?!~

John
Guest
“This test is existential and it must be overcome … if the euro fails, then Europe fails,” Angela Merkel, 19th May 2010 “We’ll save Australia Don’t wanna hurt no kangaroo We’ll build an All American amusement park there They got surfin’, too Boom goes London and boom Paris More room for you and more room for me And every city the whole world round Will just be another American town Oh, how peaceful it will be We’ll set everybody free You’ll wear a Japanese kimono babe And there’ll be Italian shoes for me… ” Randy Newman, 1972
Biker Pete
Guest

John, you shouldn’t scoff at Americans’ deeply abiding interest in advising others, particularly when their own playpens are awash in Bondi Cigars. :)

John
Guest

Bondi Cigars? Didn’t get it until I consulted the Urban Dictionary, BP:

“…there is a large market for the extreme-sport of “Hunting the cigar” where thrillseekers track the cigars and break them up (usually by squashing them with their hands)… ”

Are you suggesting that Steve is an American thrillseeker?

Biker Pete
Guest

Well, US sociologists and psychologists _have_ taken a remarkably unhealthy interest in Americans’ fascination with ‘dropping the kids off at the pool’. (And we think the Brits are a little potty?!!~)

Think we should drop this one, before it sinks into oblivion, excrementally speaking as Merkel might say?

John
Guest

Definitely. Not as funny as the Chinese ships running on water. Do you think ‘Realist’ meant they do a kind of Galilean-like-Miracle, or have the Chinese perfected H2-based shipping, do you suppose?

Biker Pete
Guest

Beat Smee, as Captain Hook once shouted. Probably around now they’ll slip us another poisoned cookie, John. Hijacking a Crash Alert Thread is a CATastrophic offence… . Back to sealing driveways. The fumes are quite wonderful!~ ;)

John
Guest

Well, they have to remember that Yankee Steve started it, with his:

“I’m an American, when China goes poof… how bad will the fallout be for Australia?” comment, BP. (I thought you bikers all wore masks?)

Biker Pete
Guest

“I thought you bikers all wore masks?”

Only the ones heavily into property, John.
(Fiendish cackles as the old bloke gleefully cartwheels down the wet driveway… .)

Show’s over folks. Cirrus biz before the rain starts.

Steve
Guest

I hadn’t realised you Aussies had a tobacco industry. How much is a Bondi Cigar?

Don
Guest

The biggest loser if China goes pop will be the government, as all that mining revenue erodes back leaving behind a larger deficit. The miners will carry on as usual, mines will close, production will scale back etc etc. Painful yes but we have been through this before.

Ross
Guest

Here is one for prozac. http://www.zerohedge.com/article/cds-traders-refuse-shift-focus-away-uk-and-france , also the recent view on the UKP-EUR cross vs the UK export figures is not good, they can’t kickstart production to take advantage and another lesson in not believing in self adjusting J curves if you destroy a place structurally backing city financial services against all else. On the capital side I’m not so sure, investments abroad have been the buffer of the past. Interesting to read early colonial Australian history which is like a venture capital window back into Uk banking.

John
Guest

“I hadn’t realised you Aussies had a tobacco industry. How much is a Bondi Cigar?”

How much you got, wadjela?

roy
Guest

The cost of CDS protection on Australian banks widened in early morning trading, mirroring activity in the stock market, which saw shares in Australian banks fall sharply. CDS spreads on National Australia Bank widened to 102.4bp from 91.8bp on May 14, ANZ Bank also stood at 102.4bp from 92.2bp, Westpac widened to 97.8bp from 88bp and Macquarie Bank widened to 148.7bp from 134.4bp.

http://www.risk.net/risk-magazine/news/1648804/eurozone-sovereign-cds-spreads-widen-amid-continuing-contagion-fears

AUD LIBOR rates might be worth watching http://liborated.com/current_libor_rates.asp

prozak
Guest

Ross,

I’ve never said things are great! They are most certainly not. 13 years of Labour over here has seen to that!

The UK still wont default….. maybe Labour might have toyed with the idea!

The Conservatives are in power (sort of) now and you’ve never seen budget cuts until you’ve seen the Tories in full swing!

Labour expanded the role of the state to ridiculous almost communist levels. Its all change now and the UK will be better for it.

It might just be a little tough medicine to get to a nice place….

Steve
Guest
Biker Pete and John, I think you took my comment the wrong way. It wasn’t meant to disparage Oz or the RBA. I have a great deal of respect for the RBA which seems more concerned with sound money than the Fed. In the states, its assumed that the Fed will slash rates and slash them hard as soon as markets or the economy turn a bit south. I’m curious as to how folks feel the RBA will react. Will the recent turndown in markets and the apparent slowdown in China cause the RBA to change from tightening to doing… Read more »
Steve
Guest

Steve’s quote of the day

“Australia the land of the sheeple”

Biker Pete
Guest
The RBA doesn’t always get it right, Steve. Even as the ASX was falling out-of-the-sky, Stevens & Co were raising rates. Suddenly it dawned on them that things were going to get really bad here (they didn’t, but the share market crashed 55.4%) so they put interest rates into a sharp nose dive, from which they’re only now recovering. What is curious at the moment is that I can refinance a couple of mil cheaper on _fixed rates_ than I can on variable rates, for twelve months. I’ve heard several views about why that may be happening. My initial supposition… Read more »
Steve
Guest

Just for the record, there’s some other guy named Steve here throwing of idiot one-liners. That’s not me.

Nirvan
Guest

The RBA wouldnt have raised rates if the Housing market hadnt gone so hot. They know that monetary policy is a blunt tool . but the government who has a more pointed tool (fiscal policy) wouldnt touch it even with a barge pole to do what it takes to control the growth of housing prices. In hindsight it would seem the housing market would have grown irrespective of a boosted First Home Owner Grant. The government really misjudged that one, I bet the RBA hated this.

Biker Pete
Guest
“In hindsight it would seem the housing market would have grown irrespective of a boosted First Home Owner Grant.” That was my foresight, if you go back through my posts. No-one would agree at the time… and many will still disagree. There were several positive outcomes from the FHOGs… and a couple perhaps not so positive for those hoping Keen was correct. Not claiming immunity here. We mistimed one buy at the top of the market… and have only recently recovered that paper loss in the last twelve months. I’m aware that a few hopefuls are waiting for the next… Read more »
Biker Pete
Guest

Every blogsite has its Resident Idiot, Steve. He and I take turns… . :)

Steve
Guest

90 day bill futures are now pricing in no more hikes in rates. Big move over the psst couple of weeks. As recently as a month ago, they were pricing in an additional 100 basis points of hikes.

Biker Pete
Guest

Maybe we should wait a little longer before ‘locking in’… !

I’d be interested to see how / if / when our other banks follow the ANZ’s lead… .

Steve
Guest

Just for the record, there’s some other guy named Steve here throwing of idiot one-liners. That’s not me.

Ohh your a yank Steve “G’Day Mate go and throw another shrimp on the barbie for ya”

There is another idiot one liner for you.

With all due respect you do not know the issue that I am talking about, Australians are sheeple because they pay prices for a below average property that you could buy you a mansion for in your country

roy
Guest

New WA Minister wants to flood land market
The West Australian

http://au.news.yahoo.com/thewest/a/-/breaking/7276 014/minister-wants-to-flood-land-market/

Biker Pete
Guest

“Australians are sheeple because they pay prices for a below average property that you could buy you a mansion for in your country…”

Location, location, location, Steve.
Go have a good look before you pack your bags… . :)

Biker Pete
Guest
“New WA Minister wants to flood land market” Sounds like a good opportunity for us to pick up some cheap blocks, Roy! :) We’ve already had to move our focus well north, to find affordable lots to build on. The state government’s main problem will be that the land they’ll release is _so_ far north and south of the two main cities that weekly fuel bills will be prohibitive for hopeful buyers…. . We lack the public transport facilities common on the east coast… and unfortunately the Libs’ commitment to creating same to service the public has been pretty woeful.… Read more »
roy
Guest

Sounds like a good opportunity for us to pick up some cheap blocks.

The state government’s main problem will be that the land they’ll release is _so_ far north and south of the two main cities that weekly fuel bills will be prohibitive for hopeful buyers.

You lost me, its a good thing to pick up blocks but they are so far away they are not viable. Interesting logic.

Biker Pete
Guest
“We’ll only buy property which will remain viable during a two-decade peak-oil scenario.” Thought that might have helped you, Roy. Any good cheap blocks close to cities will be snapped up like hotcakes. I expect there may be a few of those, if not simply to demonstrate that the state government did honour this commitment. Been over to WA? Great state, but very little between major centres, until you get well south… . Going on past experiences, one state government promises public transport, flogs off the land, then leaves it to the next mob to deliver the transport. It would… Read more »
Steve
Guest

WA:
Mr Marmion said the Barnett Government’s aim was to “bring house prices down”.

Does that quote ring the sweet sounds of chimes to your ears Biker?

Biker Pete
Guest
“Does that quote ring the sweet sounds of chimes to your ears Biker?” It might if there was a property markeT, Steven. As you know, your preferred location is quite defined. If you want a house for $300K, I can easily find you one. Greg Atkinson explained this to you much better than I could, when he redefined the situation as’property marketS’. Our preferred locations are also very defined. We initially bought only right-on-the-beach blocks… absolute beach frontage. That’s a markeT. We moved on to Special Rurals: 7.5 – 10 acres. That’s another markeT. We now build rentals on close-to-the-beach… Read more »
Steve
Guest
“You’ve probably read the stories and seen the cartoons” LMAO No biker I am New South Welsh, how would I know about WA I didn’t even know your Premiers name until I was this, all I did was put in “property prices” into google and it came up. Yes Biker when the market is flooded people who may like the sea might start to think hmm I will get better value in the eastern suburbs(it sounds odd saying that because its the other way around here) and will not be as prepared to pay as much for your house by… Read more »
Nirvan
Guest

Biker
What is your opinion about the sea erosion of beach front properties or a perceived erosion in the future that may cause government to tighten build of beach front properties. I dont trust the sea , maybe because I trust global warming it a bit more.

Biker Pete
Guest
So many responses needed here: Beach erosion: All the _absolute_ beach land we’ve owned was sold before 1990. The exception was a 7.5 acre lot with estuary/beach, which went back in 1997. Yes, I accept that rising sea levels* may take out all the beaches as we know them sometime this millennium. Very few man-made structures persist in time. I’ll advise my great grandchildren not to buy any bridges in Sydney… . * See my final point, below… . Preferred markets: The kind of land our housing minister proposes ‘flooding the market with’ is developed in partnership with a well-known… Read more »
Nirvan
Guest

Hi Biker
I am not talking about investment which you may sell off in 5 years , I am talking about 20 – 25 year residence. Sea erosion may take 50 years to happen but govt regulations against building by sea may happen in 20 years.

Biker Pete
Guest
May happen, Nirvan. We’d better get ’em all built before 2030. I’ll be 83 by then and I may not care as much as I do now… . :) Certainly the melting of glaciers is accelerating rapidly on every continent we’ve visited. Year markers back to the early 1800s demonstrate just how quickly this melt is progressing. Whether it’s a result of man’s industrial activity or part of another 10,000 year cycle, we really don’t know. We’re doing our bit to reduce GHGs in case it is. We know of no other investors installing solar electricity panels on rentals. Most… Read more »
Nirvan
Guest

Thanks for your inputs.
I will be heading off to the hills for residence.

Biker Pete
Guest

Yep, that should work… . :)

Biker Pete
Guest
Davo
Guest
Biker, Talking about the ability or inability of Governments to provide transport services. Here in Brisbane, they have been planning to build a rail line to Redcliffe Peninsula, which is about 30kms from CBD, fronting Moreton Bay. Planning has been in train (pardon the pun) since 1888! And of course, there was that wonderful example of ripping up a perfectly good rail line to the Gold Coast, only to later build a new one some 10kms further inland. I’m with you, it’s all about location , location, location. I’d rather be 6kms from the CBD, within walking distance to 3… Read more »
Biker Pete
Guest
Ned has gone over to Shareswatch, where there’s a fairly healthy property debate daily, Davo. Enjoyed your perspectives on city living. It sounds as though public transport issues are well-developed, despite the long wait for rail to Redcliffe. To be honest, we’ve shifted our position on location and public transport, possibly as the oil issues developed. 1975 – 1990: We purchased within 5 km of CBD(s) 1991 – 2001: We bought good value everywhere… 2001 – 2005: We bought within 2km of CBD. That’s something I probably need to explain a little… . My missus went through a stage when… Read more »
Steve
Guest

2005 – 2010: We now buy within 10km of CBDs.

10km??? gee thats so far out its almost as far out as where your government wants to release all this land, how on earth are people going to afford the petrol to get to work

Steve
Guest

“The state government’s main problem will be that the land they’ll release is _so_ far north and south of the two main cities that weekly fuel bills will be prohibitive for hopeful buyers.”

Fuel Bills will be prohibitive for hopeful buyers
about 15/20/30kms for the Perth CBD

HAHAHAHA

What and paying 500K for a house is not prohibitive for hopeful buyers???

HAHAHHA

When back in the day you only payed about 180K (relative to inflation) for the same house

HAHAHA

And you think they are that concerned about fuel prices when you put it into perspective like that

HAHAHA

You make me laugh you fool

Biker Pete
Guest

“When back in the day you only payed about 180K (relative to inflation) for the same house…”

I paid $32K for a home that sold recently for $650K, Steven.

(Sometimes I feel like I’m clubbing a baby seal… )

John
Guest

Now that’s a little unfair to the young bloke, BP. He obviously knows where this new land release is and it sounds like you don’t. What’s the area in which the state government is releasing all that WA land, Steve? Is it that Austin cove release, 82km south of Perth? Surely not. Or is it their Clarkson release, 32km north, where the median was 390K some time back?

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