Submitted by Simon Black from Soveriegn Man
“This time it’s different”– the four most expensive words in the English language
For at least a decade now, the world has marveled at China’s amazing economic transformation.
Hundreds of millions of people have been lifted out of medieval
peasantry and brought into the modern world. Living standards have
improved dramatically. China has become the manufacturing hub of the
And, today, China boasts world-class infrastructure on a truly
impressive scale. Beijing, Shenzhen, and especially Shanghai, have all
become modern metropolises with facilities on par with any in the world.
Every taxi driver from Melbourne to Manitoba, and every money manager
from London to L.A., recite the same mantra: insatiable demand from
China (and India) will guarantee decades of prosperity for countries
such as Australia and Canada which are blessed with the raw materials
that billions of Chinese and Indian consumers require to emulate western
So the story goes…
Thing is, once anything has become mainstream knowledge in financial
markets, it’s usually a sign we’re nearing the END of the boom. Or, at
the very least, that all the positive news is already baked in the
price. That’s where we are today with China.
The Australian press is constantly running economic puff pieces,
declaring endless rosy times for the country due to its commodity
exports to China. This sort of thing borders on propaganda.
They claim that “this time it’s different,” suggesting that the
resource boom in Australia which got underway in the 1990s is not going
to bust this time around (as has happened so often in the past).
It’s been said that, “this time it’s different” are the four most
expensive words in the English language. They have an uncanny knack of
showing up at the top of EVERY boom, just before the bubble bursts.
I’ve been around in the financial markets long enough, and lived
through enough spectacular booms and busts, to know the telltale signs
of a bursting bubble when I see them.
China today fits the bill… and that’s most likely going to be very
bad news for industrial commodity prices and the economies of the
countries that supply them. China accounts for less than 10% of global
economic activity. Yet, the country is consuming nearly half of all the
steel, cement, and copper used in the world.
You’ve seen the videos–
vast, empty ghost cities in China with thick forests of empty apartment
towers, 8-lane highways with no cars on them, and brand new government
buildings and public infrastructure all sitting idle.
I’ve read estimates from well-respected, independent (i.e. not
invested in seeing a continuance of the Chinese gravy train) analysts
who suggest that there are up to 64 million empty apartment buildings in
China. This is a misallocation of capital on an unimaginable scale.
To be sure, any time you have a government-directed boom that lasts
for 3-decades and is fueled by cheap credit, you are going to get
massive economic distortions. Construction and fixed capital formation
in China has accounted for more than 60% of GDP for more than 10 years
in a row now. This is simply not sustainable.
These empty cities, bridges to nowhere, airports with only three or
four flights per week, brand new bullet trains with hardly any
passengers (because they can’t afford the fares), and millions of empty
apartments are NOT indicators of a healthy economy at all.
True, China’s economy is quite a bit of cloak and dagger… they don’t
let you see what’s going on behind the curtain. But there is enough
objective and empirical at hand to suggest major problems in the
country, and we should take measures to protect ourselves from the
I’m in Hong Kong right now and will be heading over to the mainland
in a few days to put some boots on the ground myself (concurrent to
Simon’s PIIGS tour in Europe). Naturally, you’ll be the first to hear
about our findings, right here, in Notes from the Field. Stay tuned.