A Non-Bull In A China Shop!

China certainly has no shortage of investment fans, including such notable names as legendary investor Jimmy Rogers, who, along with billionaire-activist George Soros, co-founded the famous Quantum Fund.  Recently, UBS and Morgan Stanley have turned bullish on Chinese real estate, despite fears that the market is in the midst of a massive bubble.

However, Marko's Take does not share their enthusiasm for China's prospects as articulated in some prior essays.  To recap, China's demographic structure, which has been butchered by its population control efforts, is NOT conducive to long-term prosperity (http://markostake.blogspot.com/2009/12/baby-boomer-bust.html

China is also experiencing slower growth and  economic stresses resulting from its currency peg to the Dollar (http://markostake.blogspot.com/2010/02/is-china-miracle-in-trouble.html).

But, the cracks in the ice continue to spread.  Worsening economic problems have forced China to pare back its planned budgetary outlays.

According to a recent article in the Wall Street Journal, total government spending is slated to increase a relatively modest 11% this year, down from the 21% increase in 2009.  Slower gains in both infrastructure and social programs are expected, China's finance ministry said in a presentation last Friday to the annual meeting of the legislature.  While it promised more money for many of the administration's priorities, like education and housing, new spending was constrained by dim prospects for tax revenue this year.

The reports to the National People's Congress reflect the recent dis-harmony between Chinese official rhetoric, which still emphasizes the need to propel the economy and a series of actions in recent months to slow growth to head off possible overheating.

"There is insufficient internal impetus driving economic growth," Premier Wen Jiabao told delegates to the legislature, warrning of continued weakness in the global economy and persistent problems at home.  Though he pledged that policies supporting economic growth will continue this year, he admitted that the scale is being reduced as the government worries about future strains on its finances.

China will shoot for around 7.5 trillion Yuan (around $1.1 trillion) worth of new local-currency loans this year, lower than the record 9.59 trillion Yuan worth of new loans banks extended last year.  It will also seek to slow growth in broad money supply, or M2, to around 17% this year from nearly 28% in 2009.

One area of particular concern is the country's property market.  Quickly-rising prices in some cities are discouraging many from purchasing homes, creating a political as well as an economic problem.  "Bubble Speak"  is mushrooming among China-watchers too, with some noted critics comparing China's situation to Dubai (http://markostake.blogspot.com/2010/03/dubai-enough-to-make-you-cry.html).

Another issue is the Chinese currency, formerly known as the Renminbi, which has remained pegged to the U.S. Dollar.  Economists and currency-market participants increasingly expect that China will at some point this year allow its currency to rise against the greenback. Inflation in China is picking up as the economy recovers and from the booming increase in money supply.

Trade frictions are also on the rise.  The currency peg has helped the country's exporters take advantage of the recent recovery in world trade, but has drawn increasing criticism from the U.S. and Europe, as well as China's Asian neighbors.  For those critical of Chinese currency policy, Central Bank Governor Zhou Xiaochuan's indication that he is considering an exit from the peg was welcome.

The generally accepted notion that China is THE emerging superpower is quickly becoming more myth than reality.  Those legions of Sino-philes are looking at some unpleasant surprises as China's many policy mistakes filter through the economy. 

Still a fan of investing in China?  TAKE ME ON!

Marko's Take

We expect our next segment on YouTube, explaining the Federal Reserve, to be posted within the next 24 hours.  You can find our new series of video blogs here:  http://www.youtube.com/markostaketv.