Friday, April 2, 2010

One Eye on China: Are the Wheels Wobbling?

Here is a CNBC video clip showing Jing Ulrich talking about business conditions in China. Her perspective is one of promoting China's investment opportunities to foreign investors for Morgan Stanley. Never-the-less, she provides some interesting observations. For example, she talks about the tier one cities like Shanghai and Beijing compared with the tier two, three and four cities that would all be names I have not heard of. These cities will need development that represent needs of the population and potential asset growth in the China economic story. She points to the coming expansion of a high speed rail system as an integral piece of the rapidly developing emerging economy, creating employment now and part of the transportation infrastructure for further growth in the future.

In an earlier post, Stephen Roach, also with Morgan Stanley - Asia, stated the entire country is estimated to have a population of 1.3 billion people, 850 million of them living in the rural interior half of the country in villages of various degrees of primitive development. Within the heavily populated eastern quarter, Shanghai is the biggest tier one city with a population of about 17 million people, Beijing with about 13 million people. Compare them to the rest of the country, or to New York City with a population of about 8 million people. There are 420 million people living in the other tier one and smaller cities, concentrated in the eastern quarter of the country. Some of these people have moved to the cities, leaving their villages, relocating to where opportunity for most work in the country is, the eastern quarter. Stephen Roach makes the point that 15 to 20 million people annually are moving into the eastern cities. There are reports of empty office and apartment buildings as well as empty strip malls in some of the large eastern cities. They are made to look like big mistakes now. I'll bet the story is still unfolding for these investments. I make this point to describe my belief that the economy of China has sustainable growth potential. Analysis of this gigantic engine has to adjust for a unique condition that is not seen anywhere else in the world. We cannot simply examine conditions in China and compare them with western metrics or values.

Another point of view to consider is the case describing the existence of a financial bubble. Michael Shedlock does that well on his blog in a post titled 10 Signs of Speculative Mania in China. (This article is mostly clips from a more extensive analysis completed by staff at a money management firm, GMO founded by Jeremy Grantham, mentioned as a reference point.) IMHO, this paper discusses some possibilities based on opinions and describes some historical, world financial beliefs, while not coming to a conclusion.

Given this evidence for growth of the China economy, there is the overhanging issue of the currency being held down to keep exports affordable to the rest of the world, at the expense of manufacturing jobs in countries, like the US, now importing from China. This will have my interest on an increasing scale as the debate heats up over the next few weeks. Scanner