Guest Post: A Different Way Of Looking At China

Tyler Durden's picture

Submitted by Peter T. Treadway of The Dismal Optimist,

Hard landing, soft landing, civil unrest, dominant economic superpower – the forecasts flow freely regarding China. The fact that good data is hard to come by regarding China does not seem to inhibit many outside observers. In this piece I will look at China through the lens of economic structure, Chinese history and culture—concepts which a number of observers often overlook. My general conclusion is that Chinese GDP growth rates are about to undergo a gradual but nevertheless perceptible decline. But I now believe a hard landing crash is unlikely, assuming that Europe does not totally disintegrate and the US does not roll over into a full scale recession.


  • The Minsky/Kindleberger bubble model is not generally applicable to China. Outside observers visit China and see empty cities and excesses in capital, infrastructure and real estate investments. They think they see Western style, market bubbles. The Minsky/Kindleberger model with its Financial Instability Hypothesis describes an environment where private investors become overenthused about a particular asset and become overleveraged. The ensuing bubble followed by collapse brings about distress and panic for indebted investors and the financial system which has extended them credit. This model describes what happened in the US and other Western countries very well. But it does not describe what is happening in China where the public rather than the private sector is doing the borrowing. You do not hear stories of private mortgagors overborrowing to buy houses as happened in the US. It is a foregone conclusion in China that the government will eventually pick up the tab for bad loans made to local public sector entities and bail out the banks if necessary. The Chinese economy is state (or more precisely Communist Party) directed, not market directed. Minsky/Kindleberger style bubbles and collapses are characteristics of Western market economies, not state directed ones where overleveraged private investors are not playing a major role in the process. As long as the state has the financial resources to cover these losses a bubble type collapse can be avoided. At this point in time, the Chinese state has those resources.
  • The Chinese economy is overallocating capital to investment in real estate, capital goods and infrastructure. But the result will not be the burst of a bubble but rather a longer term continuous decline in the marginal productivity of capital. As a result, the torrid GDP growth exhibited by China will gradually slow down. Countries can’t waste capital on the scale China apparently has and register torrid GDP growth. The future for China is therefore a protracted slowing as compared to the high growth of the recent past. The cost of empty buildings and overinvestment will not in general be borne by private investors but by the state. But all those empty buildings and overinvestment will produce low or negative returns. State owned companies that specialize in these industries as well as private companies which depend on them would seem to be poor long term investment candidates. Ditto for the state owned banks which play a primary role in this capital misallocation process.
  • China has benefitted from a massive shift of labor from the countryside to the city. These people moved from low to zero productivity activities to higher productivity activities. But this is a one time event. If it has not come to an end yet, it will soon. China is rapidly becoming an urban country.
  • China as a latecomer has benefitted from being able to import Western technology Examples abound in this area. Internet search, telecommunications, airlines, medicine—the list goes on. Many have argued that stealing Western technology has been a core part of the Chinese development strategy. I believe these charges have a great deal of truth. But some scholars, in China’s defense, have argued that the US did exactly the same thing by “stealing” British technology in the 19 th century. Information wants to be free, Stewart Brand famously said. Be that as it may, this phenomenon is also a one-time event although it probably has a longer “shelf life” than the urban migration phenomenon.
  • China’s one child policy and current trends will produce an unfavorable demographic situation in the long run. The Chinese worker/retired beneficiary ratio is projected to decline steadily from here on. Actually, attributing this entirely to the government directed one child policy may not be entirely correct. All the Asian Confucian societies—Hong Kong, Singapore, Japan, Korea and Taiwan – now exhibit birth rates at close to half the replacement rate of 2.1 children per woman. All face an unfavorable demographic future. Several of these countries – notably Singapore – have tried to encourage its citizens to have more children but to no avail.
  • The idea that China is about to disintegrate or be afflicted by serious public disorders is at variance with Chinese history Yes, there are thousands of local protests each year. Yes, China has its share of dissidents. But take a look at Chinese history. Chinese history has a twenty five hundred year pattern of Disorder, Ascending Dynasty( Increasing Order), Dynastic Peak, Declining Dynasty( Increasing Disorder), Disorder. I would argue that China is in the Ascending Dynasty phase at the moment. I would argue for example that the Bo Xilai incident is basically noise—not much different in significance than John Edwards’ problem with his mistress.


Some might argue that the current Communist regime is not a dynasty in its pure feudal sense. But I would argue that the differences between the current Communist “dynasty” and prior dynasties are basically superficial. For example, the country remains centrally controlled, thought is tightly managed, the thousand year old Imperial Examinations have simply been replaced by the Gao Kao college entrance exams. Yes succession is no longer hereditary – Hu Jintao’s son is not becoming the new emperor and, alas, the Communist emperor is not permitted at least in public a bevy of concubines. But even in the case of succession the leaders are chosen from a select group where having the right parents counts .(The Qing emperors’ sartorial choice of resplendent yellow robes puts the current Communist emperors’ choice of attire to shame! )


For the benefit of those unfamiliar with this, I will reproduce a simplified version of Chinese dynastic history. Note that the Qin and Sui Dynasties were short lived but were immediately replaced by another Chinese dynasty, not a period of Disorder. The relatively shorter lived Yuan Dynasty was one imposed on China by a foreign conqueror who did not fully “Sinicize” and was ultimately kicked out and replaced by the Chinese Ming Dynasty.



Dynasty/Period                                        Dates                            Number of Years

Qin Dynasty                                         221 BCE-206 BCE               15

Han Dynasty                                        206 BCE-220                      427

Six Dynasty Period (Disorder)                220-589                               369                     

Sui Dynasty                                         581-618                               38

Tang Dynasty                                      618-906                               288

Five Dynasty Period(Disorder)              907-960                               53 

Sung Dynasty                                      960-1279                             319

Yuan Dynasty                                      1279-1368                           89

Ming Dynasty                                     1368-1644                            276

Qing Dynasty                                      1644-1911                           267

Republic Period(Disorder)                    1911-1949                           38

Peoples Republic                                1949-present                        63


Note the long life of most of the dynasties. Four of them lasted longer than the entire life- span of the American Republic, which began operations under its Constitution in 1789. The current Communist Dynasty is a relative youngster, having been in power for only 63 years. Certainly China’s political system will change and evolve but anyone predicting its early demise or disintegration is going against the record of Chinese history. To repeat: China is in the Ascending period of a dynasty in which order increases.

  • China as currently structured is not suited to the needs o f a knowledge economy. Restraints on the flow of information is a major characteristic of the current regime. A knowledge society requires complete freedom of information and political freedom in general. One can argue that at lower levels of income and development that democracy is often an obstacle. India and its problems are cited as an example. But at higher levels of income and development, where knowledge plays an important role, the opposite is true. Moreover, Confucian culture with its emphasis on obedience is not necessarily compatible with a knowledge society. One may ask how a Steve Jobs – college dropout, drug user and one time hippie – would have fared growing up in China or even Singapore or Japan. Of course he would have been squashed. And not necessarily by any laws but rather by the culture itself. Apple would still be a fruit, not a company. One might ask why Sony could not maintain a culture of innovation. Is it a basic reverence for authority and stability built into Japan’s cultural DNA? Is Apple today a better bet to maintain its culture of innovation than Sony was?
  • The work ethic and the obsession with material improvement of the Chinese people are big investment pluses for China. Of course the current economic system in China is a major improvement over the Mao era. But it is still a highly defective protectionist state dominated system that misallocates resources. The work ethic, relatively high level of education and obsession with material improvement of the Chinese people have helped make China a success in spite of the current economic structure.

Investing in China—the Southeast Asian Alternative

Even a slowing China will be an economic powerhouse in Asia. I see the countries southeast Asia as primary beneficiaries of China’s ascent. These countries would include Singapore, Thailand, Philippines, Malaysia, Brunei, Indonesia, Vietnam, Cambodia, Laos and Myanmar. Those are the ASEAN countries. A broader definition would include Hong Kong, Macau and Taiwan. These countries (and territories) are growth centers in their own right. But they are major beneficiaries of burgeoning Chinese (and Indian) tourism, trade and investment. These countries, particularly Singapore, Malaysia, Hong Kong and even the Philippines, do not have China’s corporate governance issues. Gambling comes to mind as one area where the Chinese presence will be powerful and growing. Casinos do not exist in China, a puritanical holdover from the Mao early Communist days. The soaring towers of Marina Bay Sands integrated resort and casino have now become Singapore’s iconic buildings. Banking is another area. Southeast Asian banks will participate in the region’s growth but overall they are not overt instruments of government policy as in China. And the banks and the governments have learned important lessons in the Asian crisis of 1998. Singapore is the region’s emerging Switzerland and wealth management center. Hong Kong is becoming the preferred listing for IPOs from China and globally.

Many of the companies in this region are small, suggesting the use of ETFs although that would be less true in the case of Singapore and Hong Kong where larger companies are listed.


American Tech Companies – America’s Crown Jewels

In scanning companies around the world, nothing compares with the agglomeration of companies that comprise the American tech sector. Silicon Valley, and California in particular, is one of America’s gifts to the world. Freedom of information, a vast network of financing, a world class educational system and a positive attitude toward innovation have created the Apples, the Facebooks, the Googles, etc etc. In this time of economic turbulence, these companies have been a refuge for investors. No other country can equal this record(although adjusted for size little Israel is comparable.)

The major cloud on this horizon is America’s and particularly California’s budget issues. The starving for funds of the vaunted California higher educational system has now become a major problem. The New York Times just ran an article on how Apple had been able to avoid California’s punitive taxes. The question needs to be asked what would have happened if Apple had not been able to avoid these taxes. Would Apple have moved out of state or out of the US? When France under Louis XIV revoked the Edict of Nantes in 1685, talented French Protestants(Huguenots) moved out of France to more hospitable places like England and Holland. A devastating economic blow was dealt to France by this self-destructive act. Similarly, in the late fifteenth century Jews were driven from Spain and Portugal thus depriving those countries of another valuable and talented group. Will the US, with punitive taxation, deteriorating educational institutions and protectionist campaigns against outsourcing, do the same with its technology sector? Information may yearn to be free but capital goes where it is wanted.

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Careless Whisper's picture

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battle axe's picture

But, they seem to be pissing off their neighbors more and more. Possible incident soon in the South China sea?

Manthong's picture

“This model describes what happened in the US and other Western countries”

… in the past.

Until something really extraordinary happens, this kabuki market is no more free to correct to reality and free market forces than is China.

Cognitive Dissonance's picture

"But I now believe a hard landing crash (for China) is unlikely, assuming that Europe does not totally disintegrate and the US does not roll over into a full scale recession."

That's a mighty big assumption there partner.

AR's picture

CD... How have you been?  I posted a good book down below on CHINA.  Go pick it up and read it.  You'll have a much better appreciation and understanding of China.  Worthwhile.  I've probably read 30-40 or so.  Kuhn's book is one of the better ones.  We started a small commodity arm over there 9-10 months ago.  They badly need our experience, training, and management guidance.  You be well...  AR

Cognitive Dissonance's picture

Been well my friend. Thank you for asking.

I've been involved in some extensive self-renovations of our (Mrs. Cog's and I) Plan "B" dwelling over the last several months so I haven't been around ZH that much. Should have those tasks done in a week or so, then it's back to some serious writing and Hedging.

That is unless Mrs. Cog has been adding to the (primary home) Honey-Do list of late. <sigh> I sure am a sucker for my beautiful Honey-Do. :)

AR's picture

I'm happy you are well. In the end, nothing is more important than FAMILY. After all, we only get one go-around in this short life of ours. You take care of yourself. Health and spirit too. Be well our friend...

PS: If you can and enjoy reading, go pick up that book I mention below on China entitled: What China's Leaders Think by Robert Lawrence Kuhn (ISBN: 13-9780470824450) from Amazon $30.00-60.00. I've passed out a dozen or so to colleagues. Insightful.

GeneMarchbanks's picture

Casinos do not exist in China, a puritanical holdover from the Mao early Communist days.

Puritanical? No. It's the same reason they ban Lady Gaga. Nobody in Chinese governance wants to risk the possibility of losing moral influence over the working masses.

Pure calculation in a Marxist sense on their part, the Puritans have nothing to do with it.

Let them eat iPads's picture

China is one big casino.

All they do is gamble and speculate, their growth is a mirage.

Zero Govt's picture

but they allow Macau, the biggest gambing joint on the globe

it's all about connections, as Govt is only about

it's an institution of ingratiation... "That's All Folks"

Ripped Chunk's picture

Only the Central Planning Committee can guess what to do.  Guess.

francis_sawyer's picture

You have to slant your eyes (like Miley Cyrus) to be able to 'look at things' the way a Chinese does...


jonjon831983's picture

Round eyes can't even do it right.

Silversem's picture

I still believe in the economic power of China and in think it can stay relativly stable longer than most people can emagine. Therfore longterm i am long on Chinese stocks and short term i like to trade every bit of volatility in any market using a contract for difference.

levelworm's picture

Agreed. The A-share at current lvl (around 2400) is relatively low comparing to historical data. I'd say long-term investment on the stocks will surely grant considerable profits. But I defintely won't speculate in short-term as the water is still too shallow and regulation is close to non-accessible.

*Long-term = 10-20years from now. Reason is that China (and the world) is experincing stagflation and I'd assume that this will at least last for 5-10 years, and in the same period we will probably experince a volatile market,  which is not bad for long-term investment as experinced investors can lower their cost gradually.

q99x2's picture

Here's the deal. The NWO is losing control. They can't keep funding the military machine if all the fiat is being absorbed by collapsing banks. They are getting kicked by south america. Political upheaval is going to keep costing them more. And China is looking for opportunity. They are finally laying off the military in the US. I think they are going to pack up and head out of Dodge or under Dodge. 

Which is a good thing but China may seize the moment and that might be the NWO's plan B.

Actually it is probably a good time to start a small manufacturing business.

JR's picture

It’s an election year; prepare for more disgusting things; from his dog jokes in front of the jackals of the press to his continuous use of Air Force One to support his re-election, Obama is America's Number One waster of taxpayer dollars.

AR's picture

Good afternoon everyone.  One of the better books we've read on China, and on understanding their leadership, government and the process in which they conduct business is entitled:

"How China's Leaders Think"

Written by:  Robert Lawrence Kuhn  (Published by John Wiley & Sons, 2010).

Good luck...


Hey CD, how are you doing these days?  We hope well.  We're getting old my friend.

geewhiz190's picture

EMR is the latest in a string of large US companies complaining about a slow down in Chinese business. MMM, CAT, and even YUM had complaints.  The FT of London is reporting the Chinese want to start to EXPORT copper.  In the banking area, Chinese banks are willing to pay more on 3-6-9 month cds than many US based banks-a sign they need cash.  A recent traveller to China reports the air in Beijing is unbreathable and the airports she saw inland looked empty.  a lot of clues that all may add up to something-how much?  On the surface not much of this appears to be postive.  As for the bank cd rates.  as someone who has been around for awhile, i can tell you that when someone starts bidding for funds, its never been a good omen.  maybe it's different this time.

MoneyMagician's picture

I think the author needs to differentiate from public works from private real estate investments which is, or was in the bubble. Low interest rates from increased money supply signals time preference for consumption, real estate is a consumable, or houses to be bought. As far as vacant buildings, & cities those are products of the state directed allocation, which include state owned banks, & other companies. Chinese government gurantees loans to socialize losses, but squandering of capital is still the same. The consumption of capital ensues, a economy decays, growth slows, generally wealth stagnants, even reverts back to the cave man era if the extreme is high enough. China will not endure a hard landing? Well it depends how much capital is squandered compared to the quality of capital acculumation & maintenence. China still very much a state run economy, even if it has certain characteristics of capitalist structure.


China's economy really boomed from savings, and profigate US consumer spending as well as currency manipulation. However, sectors like their agriculture are not fully developed. Their agriculture is not as productive as US agriculture for example. A lot of their agriculture is still done the way agriculture was done for many years in China.


With the current economic environment, & the global crash, I suspect China is doing more things to stimulate supply side exports, but also more demand side by stimulating chinese domestic consumption all centrally planned. So I don't know, but I wouldn't bet on China as I am skeptical of central planning.

Nels's picture

You do not hear stories of private mortgagors overborrowing to buy houses as happened in the US.

Well, yes I do, and right here on ZH.  The mortgage might show 40% down, but that 40% was borrowed from family, friends, or the local loan shark.

Disorder is in the eye of the beholder, and comes in both ascending and descending cycles.  Hopefully it won't be as bloody as when the Mao Dynasty was ascending, or descending for that matter. 

What does impress me as different in China is that they will give a death sentence for financial crimes.  We've pretty much decriminalized financial crimes here.  But along the same lines, the idea that they will save all the small real estate speculators and paper over their losses seems way out of character.  I'd expect to see a new class of kulaks defined, demonized and punished, with all their assets taken to help cover any losses.  It's not like they really need to worry about the next election.

Let them eat iPads's picture

If things are going well in China then why is anyone with any substansial wealth fleeing to the west?

Haddock's picture

Forget numbers, 'money' and the economy.

For how long can the Chinese government keep people busy. It's the only thing that matters.

YHC-FTSE's picture

1. The conclusion tallies with observation, so nothing new there. China's GDP growth rate is indeed declining as it should - no country can maintain a rate of growth that is double digits forever. (So is everyone else's, but hey, we're on the subject of China). 

2. Personally, I dislike any models that promote the cyclic nature of some phenomenae like economic bubbles. It doesn't explain anything except that it will iterate. I think economic bubbles - where high volume trades are conducted at prices that are at variance with intrinsic values - have more to do with money supply and social psychology than magic cycles. Anyway, China is NOT immune to economic bubbles - no country that is inhabited by your average stupid, greedy ape is immune, and the Chinese are just like the rest of us stupid, greedy apes when it comes to moral hazard and herding behaviour. I do agree about the reduction in growth rate which is only logical, but disagree that China will not have a bubble because it has a command economy. I'd suggest the writer open his eyes to the fact that we're ALL living under a command economy these days in the West, and nobody is immune to financial bubbles. I would guess that sooner or later, the state owned banks will have to deal with the growing bubble of NPLs, and when that pops, China will experience a crisis not dissimilar to the one we're currently experiencing. Perhaps they will do a better job of dealing with it: Bullet to the head of each banker, instead of bailouts and bonuses that we lavish on ours.

3. No real gripes about demographics (Although the 1 child policy is currently under review, and a mature population (Not geriatric, but mature) does not necessarily mean a decline in productivity. As for technology transfers, the Americans have stolen more technology from Britain and Europe during the past 100 years than you can imagine, so you don't have to put the word "Stealing" in quotes as though you really haven't. Space rockets from Germany, jet engine from Britain, supersonic flight from Britain, the computer from Britain, www from Britain... the list is endless and it didn't stop in the 19th century you thieving lying prat. As for the Chinese, we in Europe stole their silk tech, ceramics tech, gunpowder tech, and so many others that crop up from time to time over the centuries, that I find it amusing to come across ignorant pots calling the kettle black. Needless to say, information does want to be free. Just a shame that the biggest hoarders of information happen also to be the biggest thieves who go to ridiculous lengths to hide and guard their stolen works like patenting genetic structures stolen from nature itself, for example by big pharma and the biotechs. The fact that the author calls Apple an "innovative" (quotes deliberate) company shows that he knows nothing about innovation, except what he is told by drunken jingoists and slick advertisers.

4. The history lesson was interesting, and was a thought provoking contrast to modern China. 

5. Investing in China. When I went to Seoul, South Korea recently, I was surprised to find that its old international airport (Gimpo) was no longer used for international flights. They made a brand new one on an island off the coast of Inchon which was superb. Anyway, I was told that Gimpo was still used, but mainly for domestic short haul flights which included cities in China and Japan! If the South Koreans who fought a major hot war, then a cold war with China (Over North Korea) for 4 decades now regard cities in China as the same as domestic cities, then the level of state and commercial cooperation between these countries have reached a par with the countries in the EU. I would suggest that investment opportunities managed by South Koreans, Japanese Singaporeans and Taiwanese have grown in tune with the growing ties within these Asian Tigers. 

6. American tech companies are only as good as the technicians, and I don't think America has produced domestic talent worth anything for a long while. We in Britain know it as the "Brain drain" - where our most talented scientists and graduates are enticed to live and work abroad. Politically and economically, the USA is no longer the destination of choice, so it can no longer rely on imported talent to work in its technology sectors. Whether it is drugs, cars, software, or hardware, "Made in USA" means crap to an European consumer like me. I expect "Made in China" to be crap so it is a nice surprise when it isn't, but "Made in USA" bring no such pleasant surprises. Ever. When you start to believe your own bullshit and greatness, that is when you are at your most pathetic. Most intelligent Americans would have a hard time with the author's assertions about American tech companies. 


Finally, when in the late 15th century jews were driven from Spain and Portugal, both countries enjoyed the greatest expansion of wealth in their respective histories for the next 300 years, so that is probably a bad example to use for disseminating the myth that jewish folks are valuable or talented. 


Not bad. Not good either, but not bad. (Quick reminder of my background: I went to China in the 90's to set up joint ventures for British and American companies when it was BLOODY awful and difficult. The first time I went there, I was deeply disappointed and hated every second of my stay, but the next few times over the years changed my views of China and its people. They picked themselves out of abject poverty through sheer hard work, adaptability and determination. I doubt there is any other nation on the planet which could have done the same. I haven't been there for over 5 years, but the changes I have seen in that country over the decades since the first time I landed there with a handful of other foreigners is truly beyond belief.)

silverdragon's picture

China is investing heavily in expanding city infrastructure, subways, roads etc city to city train lines, better highways increasing the quality of the roads and railroads that connect it to all the countries that surround it.  This massive investment in infra structure makes it easier for its economy to connect with all its neighbours.

This century is Chinas' century, its integration of its economy with all the countires of the world will pay off nicely.


jonjon831983's picture

Re the dynasty chart.

Past results are not an indicator of future returns.


Not only that, having a dynasty last for some hundred years says nothing about the quality of the regime.  You gotta remember, this America and the european descendants existed in these lands for only a short period - the land that comprises China has been inhabited for thousands of years.


Despite those who try to romanticize China's greatness, their history like any others' is actually incredibly bloody.  Why else do you have oft cited works like Sun Tzu's Art of War, et al.  China is just like any other culture, and every culture has its good and bad.  It is just a matter of whether they are lucky to be in an environment that works for them at the time.

web bot's picture

This is a good lens to help us think about how to view China.

Nice work.