It's Time to Sell China

For the last few years, China has been the driver of global economic growth. The U.S. is stuck in a weak recovery, Japan has fared even worse, and Europe is stuck in a debt and currency crisis no one envies. But there are a lot of outstanding questions about China's ability to maintain a stable economy for the long term.

The Chinese have proven to be master manipulators of their own economy in an effort to maintain growth. A little extra lending here and a sprinkle of stimulus there, and the country's problems are solved quarter to quarter. This summer there was a scare that the economy was slowing, but the government quickly patched the weakness with a $158 billion stimulus package and more monetary easing.

The problem is that stimuli aren't a way to strengthen an economy for the long term, and I'm worried that the worst it yet to come for China.

Stimulus that never ends
China has been goosing its economy regularly since 2008. When the financial crisis began to grip the global economy, China announced a $570 billion stimulus package to insulate the Chinese economy from the fallout. The spending lasted two years and helped China maintain growth throughout the crisis.

China also stimulated the economy through expanded lending at state-owned banks (which I'll cover below). These banks provide funding for new businesses and businesses looking to expand. They're more focused on maximizing employment than on maintaining stringent lending standards.

This year's $158 billion stimulus package is less about a reaction to global events than it is about China's own economy. There was fear that China would grow more slowly than previously anticipated, and if the Chinese economy were to crash-land, it would be devastating to both China and the rest of the world.

But here's the question: When will China's economy stand on its own without the help of government stimulus?

You thought our spending was bad?
The official stimulus funds are just part of the stimulus China gives to its economy. The country's state-owned banks also provide financial stimulus to the economy, and they play a major role in industry.

In the solar industry, which I follow closely, the China Development Bank granted solar and wind companies up to $47 billion of loans in 2010, boosting production of both renewable energy sources. These were essentially lines of credit given to companies that never would have qualified for such funding in the U.S. The funds were used to build out capacity in wind and solar, which left both industries oversupplied. Profits for the companies that received credit, like LDK Solar (NYSE: LDK  ) , Yingli Green Energy (NYSE: YGE  ) , Suntech Power (NYSE: STP  ) , and JA Solar (Nasdaq: JASO  ) , dried up, and there's little possibility these loans will ever be repaid in full. This is just one example, but you can see this sort of stimulus in industries throughout China.

China isn't yet rampant with bankruptcies from companies or projects that should never have been built in the first place, but this may be coming. The Wall Street Journal recently reported that China's largest state-run banks have begun preparing for bad loans. Their provisions for bad loans are up for the third consecutive quarter, and they are worried about China's growth slowing (hence the stimulus).

Many of these loans rely on increased economic growth to become profitable. The loans to companies manufacturing low-margin goods for export rely on demand from global markets. Loans for housing developments throughout China rely on a growing and more affluent Chinese economy. The stimulus from the government, combined with the increased lending from banks, has propped up the economy and led to growth -- but neither of these strategies are long-term solutions. The situation resembles a house of cards on the brink of collapse.

Long-term trends work against China
One of the big challenges going forward is that China has built its economy on a foundation of abundant, cheap labor. But this isn't a long-term solution for any country.

Fellow Fool Morgan Housel has reported that China's working-age population is expected to shrink by a whopping 200 million people by 2050, due in large part to the one-child rule.

As China's workforce shrinks, the remaining workers will demand higher wages due to simple supply and demand. ABC News reported that at Foxconn, where most of Apple's (Nasdaq: AAPL  ) products are made, the average starting wage was $1.78 per hour. A wage like that would be unthinkable in the developed world, and if China's workforce declines by 200 million, it will be unthinkable in China in coming decades.

We've already seen workers demand marginally higher wages in China, and as the workforce shrinks and the middle class grows, that challenge only becomes greater. If costs go up to manufacture products in China, what will happen to China's export economy?

U.S. companies have already started to bring some manufacturing back to the U.S., and it's likely more is on the way as the costs of labor and shipping rise. If a company like Apple could produce its goods in the U.S. for close to the cost of China, don't you think it would eliminate the headache and do so?

How does this end?
The big question for China is how it turns a stimulus-driven, export-based economy into a sustainable, consumer-driven economy. China is making some strides in this area, but the current direction has me worried that there could be a hard landing or a financial crisis ahead. There are tens of billions of dollars in loans that seem questionable at best, and China's labor situation seems like a long-term disaster.

China isn't a place I would like to be investing my life savings today with these challenges. Instead, more stable, safe economies like the U.S. seem like much better bets.

What to do now
With slowing growth in China, many investors are worried about heady growth going forward, but fear not, for "The Future is Made in America." Domestic manufacturing is poised once again to become the investment driver of the world -- and all because of one disruptive technology. You can uncover the three companies that will become the American Steel of tomorrow in our analysts' new free report. Just click here to read more.

Fool contributor Travis Hoium has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Suntech Power Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 01, 2012, at 5:54 PM, xetn wrote:

    "The Chinese have proven to be master manipulators of their own economy in an effort to maintain growth."

    Exactly how is this different from the actions of the FED or the ECB?

  • Report this Comment On November 01, 2012, at 5:58 PM, erniemink wrote:

    There is at least three major investors who were born in America that work in Shanghai China that have shown the United States and China are conspiring to destroy the U.S. Dollar in favor of a world currency possibly connected to the Chinese currency. It is known that secrets are being leaked and people are coming forward in great risk. The media is owned by at least 5 corporations connected to, you guessed it, the Federal Government. Still don't believe in conspiracy? If things keep going the way they have been under the carpet, YOU WILL soon enough in one way or another. Suspicion of treason is part of it. People need to have an open-mind and be awake. The truth is not always pretty and not always nice, but a one world government and belief system under the luciferian philosophy has been underway for a very long time. I think the U.S., sad to say, has been sold down the river a long time ago. I hope this travesty of injustice, greed and false flag wars end soon.

  • Report this Comment On November 01, 2012, at 6:16 PM, Gorm wrote:

    In a contracting global economy it escapes reality that China can avoid harm, especially when Europe is such a major export destination, and China is so export driven.

    Have read articles about China hyping reports, making themselves look better than reality. STILL, reality haunts everyone. When Australia and Brazil complain of decreased exports to China there is cause for concern.

    China is rumored to have all kinds of loan problems, a real estate bubble, and is always leery of the social uprising risks attributable to those urban migrants.

    Given the problems in Japan, Europe and questionable status of the US, is it any surprise that China is contracting EVEN more than publicized?

    In a global economy driven by an ever increasing consumption demand, JUST WHO is doing all the consuming????

    Have to believe that our black swan will be acknowledging REALITY!!

    Gorm

  • Report this Comment On November 01, 2012, at 7:27 PM, IzzyWaz wrote:

    Good article.

    One question though, didn't the United States invest $90B in green energy that did not pan out?

  • Report this Comment On November 01, 2012, at 7:55 PM, VentureY wrote:

    Listining to your campaign bull whom no one underatnds why $6billion is being spent in a political campaing, why? For what? So that your vote those not mean one little thing after either one is elected! You have to be kidding when the Chinese own so much of your debt. If they wish they can make your economy crawl to a stand still. The same thing that the USA did to England when they went to war with Egypt. Who controls the debt of one country has enough and lots of power to tell you what they accept or reject.

    You know what the state of your economy is and you have the guts to tell me that China's economy smells rotten? I beg to differ even though I know their economy is not sound because none of them are period. This is just a game of checkers all of the economies there is nothing solid just expectations in another words speculation.

    Oh yes you are referring to that expert who runs a hedge fund that started to short Iron Ore today. Well good luck to him because I believe his is in for a surprise!!!

  • Report this Comment On November 01, 2012, at 8:32 PM, Lituus wrote:

    I agree with xetn, how is China doing anything different than what the US and other developed European governments are doing? This article is ridiculous.

  • Report this Comment On November 01, 2012, at 11:41 PM, saron1 wrote:

    "There are tens of billions of dollars in loans that seem questionable at best, and China's labor situation seems like a long-term disaster"

    Why can't they can indefinitely finance these loans with U.S. trade deficit. In 2012, we spent a net of $203B in China.

    The labor problem is long-term, measured in decades, not single years.

    Their growth has shrunk a lot but that seems due to overall world demand - as the world recovers, so will China.

  • Report this Comment On November 02, 2012, at 1:06 AM, tommfoolery wrote:

    Wow .... who are these 5 corporations that are connected to the “Federal Government” that own the media .... ????

    Which media do they own .... ?????

    And who are the three, American born, major investors working in Shanghai ..... ?????

  • Report this Comment On November 02, 2012, at 1:07 AM, LoadDrive wrote:

    China : For A COUNTRY that is about to go under

    Ticker# FXI sure has done well (grin )

  • Report this Comment On November 02, 2012, at 8:41 AM, wwu12345 wrote:

    The author of this article sounded quite foolish. For one, if you replace the name of "China" with "USA" you do not need to make much change to the article.

    The second is, all the China bears have failed for the past decades. For your article, even on a short-time scale, does not make sense to me. China is most likely on a short-term rebound now. Why sell?

  • Report this Comment On November 02, 2012, at 9:07 AM, ETFsRule wrote:

    This is nonsense, China is doing fine. Their debt/GDP is only 26% and they still have a lot of room to lower interest rates if they need to stimulate the economy.

    Their aging population will be a serious issue, but not for another 20 years.

    "The big question for China is how it turns a stimulus-driven, export-based economy into a sustainable, consumer-driven economy. "

    It's not a question... it is already happening at an incredibly rapid pace.

    Consumer spending in China increased by more than 22% last year:

    http://www.tradingeconomics.com/china/consumer-spending

  • Report this Comment On November 02, 2012, at 10:13 AM, MKArch wrote:

    http://news.morningstar.com/articlenet/article.aspx?id=44501...

    I'm glad to see a TMF article tackling the unsustainable Chinese bubble but you miss the biggest issue with their economy. Their economy is being propped up by an unprecedented in modern history building bubble. Uneconomic loans to the solar industry may be the latest sign of problems building up in China but the real issue is 50% of their GDP is accounted for by construction and they've already built out infrastructure for the next 30 years.

    I think ponzi scheme is a better description for their economy than house of cards. When they finally have to stop building apartments no one will ever live in, offices no one will ever work in, malls no one will ever shop in and roads & bridges no one will ever travel on the ponzi scheme will fall apart like all ponzi schemes do.

    I hear a lot of discussion about their banking system and I can see bad loans being the trigger that finally causes the ponzi scheme to fall apart but I don't hear a lot of talk about where all the people employed building stuff with no economic purpose are going to work when the ponzi scheme falls apart. Construction was 15% of our GDP at the height of our recent housing bubble but jobs in the construction industry accounted for about 40% of total job losses in the recession and I think if you add in related industries it was about 50%. Construction is an unprecented 50% of China's GDP. God help the Chinese when they have to finally stop building.

  • Report this Comment On November 02, 2012, at 11:03 AM, billcarr wrote:

    Comments from FOOLISH readers indeed.

    Some of them appear quite deranged. I read similar comments about USA in my newspaper. I would not write of USA and I certainly would not write off China. It is obvious that many are basing their 'thoughts' on hearsay or rumour and have no idea what China and its people are like.

    I think MF is mistaken in allowing articles from readers or any Tom, Dick or Harry when we have no idea of their level of expertise, if any!.

  • Report this Comment On November 02, 2012, at 12:53 PM, saron1 wrote:

    China should be a great investment for at least the next five years. And the reasons are exactly what you have listed:

    1.) massive government stimulus in emerging industries funded by the U.S. trade deficit

    (the real reason Solyndra went bankrupt)

    2. their rising labor costs are at least a decade from becoming a problem for industrial manufacturing and 2 decades for hi-tech manufacturing.

    3. the world economy improving - resulting in new manufacturing growth in China

    Ofcourse many smaller chinese companies will fail in the process of creative destruction. But leaders will emerge or fortify their postions.

    Finally, the investments you have to worry about are U.S. companies with high percentage U.S. revenue - because of the austerity fever that has gripped Congress. Government does not create jobs (mostly) but it does create companies that create jobs.

  • Report this Comment On November 02, 2012, at 2:00 PM, MKArch wrote:

    billcar,

    Read the article I linked. That's not hearsay that's FACTS! 50% of the Chinese economy is based on construction of things that will generate little to no economic return. There is NO precedent for the level of construction going on in China right now and that's a fact. The only reason for this much construction is to prop up their labor market and GDP growth.

    Even the China bulls admit this can't last, they just bank on a fairy tale about how the Chinese government is going to make a miraculous transition from a construction based economy to a consumer based economy. Even though consumer spending is up in China the consumer contributes a small part of GDP and it's been shrinking as the construction bubble has caused construction to outpace the consumer.

    With construction amounting to ~50% of GDP it's going to take the Chinese consumer down with it when it comes crashing back to earth and all of those construction jobs vanish. The China bull case is just that bull. There's no way the Chinese goverment can flip a switch and replace construction with consumerism and suffer just a modest and short slow down of their economy in the process. When Chinese building bubble finally pops for good the Chinese economy will pop with it.

    The good news for the U.S. is we export next to nothing to China and the commodity bubble will pop with China as well bringing commodity prices back to earth which will be a boon to our economy and much of the rest of the world (except commodity exporting countries).

  • Report this Comment On November 02, 2012, at 2:58 PM, dsciola wrote:

    Intersting thoughts all around.

    My thoughts are, if its time to sell China, then is it time to also sell everything? This past summer, it seemed there was a strong consensus that a significant slowdown in China would negatively affect US equities. If a major pullback / recession happens in China, that could reverberate here as well.

    Also, that 'peceived slowdown' I believe equated to approx'ly 7% GDP growth if I recall, numbers we would definitely envy, even if that may be a slowdown by Chinese standards.

    Only other item that I wonder about is the so-called 'ghost towns' that China is allegedly building. One of the previous posters I believe alluded to it indirectly. I have heard allegations that China is literally building up towns with no inhabitants to help fuel / inflate its growth. Don't know about the validity of these claims, but nonetheless have to wonder if this another smoke and mirrors scheme.

    Dom

  • Report this Comment On November 02, 2012, at 4:11 PM, zgriner wrote:

    "The Chinese have proven to be master manipulators of their own economy in an effort to maintain growth."

    Pray tell, how does anybody know what is truly going on in China, other than what China chooses to tell us??

    For the last 20 years or so, China pursued a brilliant policy of giving the capitalist West enough rope to hang themselves. The West fell all over themselves setting up factories in China, giving China free valuable manufacturing expertise and other technologies, all for saving the all-mighty buck.

    Meanwhile, China manipulated their currency to our downfall. One reason that our recession has lasted this long is we don't have relatively unskilled manufacturing jobs anymore that people can fall back on.

  • Report this Comment On November 03, 2012, at 2:32 AM, liulu wrote:

    One advantage that Chinese companies have is whatever they do they do it in scale, supported by the markets of the whole world but the US alone, and more importantly, more and more by its own huge markets which can easily overshadow anyone’s else. For example, Huawei became a behemoth without the US market. On the other hand, more and more foreign companies enter China not only for the benefits of its cheaper labor but also for those of its infrastructure, its established production chains and efficiency, and more importantly its huge markets, all within one border. GM now sells more cars in China than in the US. So, why would GM want to leave China? The same thing will happen to Apple and other companies too. Yes, China will eventually stop. But due to its huge size, it will take a long time for that to happen. The only thing that may stop China suddenly is its own political disaccord.

  • Report this Comment On November 03, 2012, at 9:34 AM, ETFsRule wrote:

    "With construction amounting to ~50% of GDP..."

    By the way, construction is not anywhere near 50% of their GDP. It is around 20%.

    http://seekingalpha.com/instablog/702244-kurt-shrout/150323-...

  • Report this Comment On November 03, 2012, at 10:19 AM, MKArch wrote:

    <<<By 2010, China was spending 273% more on physical capital than it was in 2000, with GCF accounting for a 49% share of output by decade's end. Yet Chinese households were "only" consuming 97% more than they were in 2000, depressing the share of household consumption of total GDP to 34% by 2010, a paltry share by any standard and the lowest level seen in China since the founding of the People's Republic>>>

    That's from the M* report I linked earlier. I'll take that and all the other sources citing 50% over a communications major penning for Seeking Alpha any day.

  • Report this Comment On November 03, 2012, at 10:23 AM, MKArch wrote:

    OOPs just noticed S.A. turned him down and he had to put it out as an instablog. You've gotta do better than this.

  • Report this Comment On November 03, 2012, at 11:02 AM, MKArch wrote:

    Just as a frame of reference for how massive the building campaign in China is right now I posted a couple of stats from the M* article I linked above and one from a Business Week article below.

    *********************************************

    By some measures, China's physical capital base already looks like that of a major developed economy. Consider the installed capacity of China's steel industry. Now roughly 5 times the size of what it was a decade ago, capacity is nearly twice that of the United States, Japan, and the European Union combined. Notably, the latter collection of economies has nearly 1 billion people of its own and collective GDP of about $36.6 trillion, making it more than 6 times the size of China's economy.

    China's expressway system, the national trunk highway system, also looks rather overbuilt. By year-end, the NTHS will have quintupled its 2000 length. Heading into the year, the total length of the NTHS (45,554 miles) was already on par with that of the interstate highway system (46,876 miles) in the U.S., a country of similar size but with 3 times as many cars on the road

    http://www.businessweek.com/news/2012-10-02/iron-ore-heads-f...

    China accounts for 65 percent of seaborne iron ore demand.

  • Report this Comment On November 03, 2012, at 1:56 PM, ETFsRule wrote:

    MKArch:

    Here are the numbers for China:

    "GDP - composition by sector:

    agriculture: 10.1%

    industry: 46.8%

    services: 43.1% (2011 est.) "

    source: The CIA World Factbook

    https://www.cia.gov/library/publications/the-world-factbook/...

    "Industry" includes construction as well as manufacturing, mining, the oil & gas industries, and everything else that falls under the category of "industry".

    It is perfectly normal for "industry" to make up 50%, or even higher, of the economy for an emerging country:

    https://www.cia.gov/library/publications/the-world-factbook/...

    When your source talks about "physical capital", etc, they are talking about a lot more than just construction.

    This is also evident in their numbers about the US.:

    "In 2000, before the boom really kicked off, gross capital formation (or GCF, the GDP accounting term for investments in physical capital) accounted for 35% of Chinese economic output. While large by developed economy standards (the U.S. 10-year average is 19% ..."

    The US 10-year average for construction spending as a % of GDP is not 19% - nor did it approach that number in 2000 (it would have been around 7.5%).

    Source:

    http://research.stlouisfed.org/fred2/graph/?g=cqR

    US construction spending as a % of GDP peaked at 9% at the peak of the housing bubble.

    Source:

    http://www.cepr.net/index.php/graphic-economics/graphic-econ...

    Clearly, your article is including things like manufacturing expenses, etc, in their figures. This is not "construction spending".

  • Report this Comment On November 03, 2012, at 2:42 PM, MKArch wrote:

    ETF's there could very well be differences in what is counted in GCF but M* is impartial, compares China's level to other precedents of emerging markets on the same basis and comes up with the level being unprecedented in modern history by a long shot. The fact that they cite all of the various examples from the construction industry as examples of excessive investment along with the many other sources out there pointing this out is a good evidence this is accounting for most of GCF. China consuming 65% of worldwide seaborne Iron ore is also pretty good evidence that their economy is way too dependent on construction.

  • Report this Comment On November 03, 2012, at 3:41 PM, ETFsRule wrote:

    ^^^

    You mentioned iron ore and steel a couple times, but those commodities have little do to with houses, apartments, or shopping malls.

    As the world's manufacturing center, China uses a lot of steel to build factories and related infrastructure. And their military, probably.

    It's true that China's numbers are unique - because there has never been a country like this before. But their consumer spending is increasing much faster than their GDP growth, so it seems that they are moving in the right direction.

    As far as over-investment, I don't think people usually put it into the proper perspective. The key is to look at China's urbanization.

    "In the next three decades, the number of China's urban residents is expected to grow by 360 million people to 970 million. In terms of current urban populations, this is the same as creating city space for entire urban America (260 million), Japan (85 million) and another 15 million people - within one generation. "

    Source:

    http://www.newgeography.com/content/001906-china%E2%80%99s-u...

    So they need to create room for another 360 million people in their cities over the next 30 years. This is an unprecedented challenge that requires an unprecedented solution. I would say it is almost impossible to overbuild.

    Also: even if there are a few empty cities that were recently built, that doesn't indicate overbuilding - it indicates that they are planning ahead. We have no way of knowing if they have police and fire departments set up yet, running water, etc - and, they need to issue permits (ie: hukous) before anyone can move there.

    http://www.theglobeandmail.com/report-on-business/internatio...

  • Report this Comment On November 03, 2012, at 9:32 PM, MKArch wrote:

    Iron ore is a key ingredient for making steel which is primarily used to build things like offices, apartments and bridges. I'm going by memory but China's GDP is something like 25% of the U.S. and yet they are consuming 65% of the worlds supply of seaborne iron ore. That doesn't raise a red flag?

    In regard to urbanization of China read the M* report I linked. They are already mostly urbanized. They understate their urbanization level by defining a city in a way that would discount most of the major cities in the U.S. as being a city. They already have a highway system the equal of the U.S. with about the same land area but with 1/3 the drivers. The percentage of GCF to GDP compared to past emerging market countries eclipses them by a long shot. Periods of high GCF by these other emerging market countries were followed by a sharp fall off in GFC and the higher the percentage of GCF to GDP the bigger the fall off.

    I'm not sure what the relationship of consumer spending to GDP is in China but the central point of the M* report is that the rise in GCF in China over the last decade has eclipsed that of consumer spending such that the consumer currently represents and all time low proportion of China's GDP.

  • Report this Comment On November 04, 2012, at 10:04 AM, ETFsRule wrote:

    Household spending as % of GDP is up over the past couple of years:

    http://www.tradingeconomics.com/china/household-final-consum...

    This is consistant with the number I posted earlier (22% growth in consumer spending in 2011). China's GDP did not grow by more than 22% in 2011. Therefore, personal spending over GDP cannot be at an all-time low. If anyone tells you otherwise, they are simply wrong.

    "I'm going by memory but China's GDP is something like 25% of the U.S. and yet they are consuming 65% of the worlds supply of seaborne iron ore. That doesn't raise a red flag?"

    Not really. They are developing, and they have over a billion people.

    Per capita, China consumes less steel than Germany, Taiwan, and South Korea:

    http://sujaiblog.blogspot.com/2012/09/india-is-not-producing...

    "They already have a highway system the equal of the U.S. with about the same land area but with 1/3 the drivers. "

    The number of drivers in China is increasing at a ridiculous rate, and they will probably have more total drivers than us in about 15 years. Building their highways is perfectly reasonable.

    http://www.transportation.anl.gov/pdfs/TA/398.pdf

    Their steel usage is certainly going to decline in the near future (or, at least, the growth rate will decline). But, none of this indicates overbuilding to me.

  • Report this Comment On November 04, 2012, at 5:19 PM, MKArch wrote:

    It looks like the M* analyst was citing China's 2010 consumption numbers and 2011 is a little higher per your link but still at very low proportion of over all GDP. In addition to the stat about China consuming 65% of worldwide iron ore I'm reposting some stats from the M* article about the size of China's steel industry.

    "By some measures, China's physical capital base already looks like that of a major developed economy. Consider the installed capacity of China's steel industry. Now roughly 5 times the size of what it was a decade ago, capacity is nearly twice that of the United States, Japan, and the European Union combined. Notably, the latter collection of economies has nearly 1 billion people of its own and collective GDP of about $36.6 trillion, making it more than 6 times the size of China's economy."

    This doesn't smack of an economy way to reliant on construction?

  • Report this Comment On November 04, 2012, at 5:24 PM, MKArch wrote:

    Correction above, China consumes 65% of worldwide "seaborne" iron ore. I'd also like to point out that with construction driving the economy it's also driving the increase in consumption and when they stop building consumption is going down with it.

  • Report this Comment On November 04, 2012, at 11:51 PM, ETFsRule wrote:

    ""By some measures, China's physical capital base already looks like that of a major developed economy. Consider the installed capacity of China's steel industry. Now roughly 5 times the size of what it was a decade ago, capacity is nearly twice that of the United States, Japan, and the European Union combined. Notably, the latter collection of economies has nearly 1 billion people of its own and collective GDP of about $36.6 trillion, making it more than 6 times the size of China's economy."

    This doesn't smack of an economy way to reliant on construction?"

    No. This paragraph doesn't even mention "construction".

    "Correction above, China consumes 65% of worldwide "seaborne" iron ore. I'd also like to point out that with construction driving the economy it's also driving the increase in consumption and when they stop building consumption is going down with it."

    Construction doesn't drive their economy: it is mainly driven by exports. Construction is only 20%, which is less than half the size of their service industry.

    If you are trying to argue that they are using more steel than their country can support, then the best way to analyze this is in terms of steel per capita. This will tell you if they have built too many apartments, shopping malls, or whatever else you are worried about. And as I said earlier, China uses less steel per capita than Germany. Their steel usage per capita is perfectly reasonable - therefore, it is very unlikely that they are overbuilding.

  • Report this Comment On November 05, 2012, at 2:33 AM, plumgrape wrote:

    At the moment, I am wondering if you think people in Hong Kong, if you make an agreement, say for example like to/for lending or borrowing money, and the agreement is then subsequently broken if you think that they (the people in Hong Kong who borrowed the money for example) think this is clever or not?

  • Report this Comment On November 05, 2012, at 12:47 PM, maniladad wrote:

    plumgrape: I think I understand your question. Yes, I believe that the majority of people in Asia think that if you cheat or betray someone and make a profit, that you have been clever. The rules are different here. It's not an absolute. My impression is that about 80% of people in the US/Canada/UK are honest and act with integrity. In Asia about 80% of people are not and do not. This is not uniform throughout Asia but it's a fair overall appraisal. What has impressed me is that it is the same in all economic levels. Some of the most honest people are very poor and it seems the worst of the thieves are in the upper class.

    And there's no value in arguing that the Asians are wrong and the Westerners are right. If you don't like the rules, don't get in the game.

    D

  • Report this Comment On November 08, 2012, at 2:57 AM, jfrankh57 wrote:

    Problem is you miss the real mark. China is a dark investment cesspool and there is little light shed on the metrics that make for sound investments...

  • Report this Comment On November 08, 2012, at 12:48 PM, naughtyguy wrote:

    The Chinese government has the ability to raise trillions of dollars in very short order. They own all the land in China. If they decide to sell their land and impose property taxes, they will have plenty of stimulus money. Their wages are increasing. Republicans don't seem to understand or don't want to admit that consumers are really the "job creators" by creating more demand for products. The Chinese economy will benefit from the increase in wages. (Disclaimer...I own stock in SUTR, a steel company in China)

  • Report this Comment On November 08, 2012, at 2:50 PM, eremmell wrote:

    China is a communist police state, run for the benefit of the "princelings" (the descendants of the winners of the Communist revolution). Corruption is rampant. China follows their own laws, and does not respect international law. U.S. investors have no protection there. Outside auditors are not allowed access to a Chinese company's books (when a Chinese company has a large reputable auditor like KPMG behind them, that is actually not KPMG, it is a Chinese subsidiary AND QUITE DIFFERENT). DO NOT INVEST IN CHINA if you want to preserve your capital.

  • Report this Comment On November 08, 2012, at 4:32 PM, savant55 wrote:

    I completely agree with you eremmell for your reasons and also because the Chinese government is infamous for their treatment of the ordinary people who slave in fields for perhaps 2 meals per day. That, together with forced abortion or down right murder of new babies, makes the Chinese communists the most treacherous government in the world.

  • Report this Comment On November 08, 2012, at 5:40 PM, TheRealRacc wrote:

    Reading ETFsRule and MKArch has been very interesting. I cannot make an educated comment on your discussion, but after I finished reading your posts, one statement left a standing impression: "even if there are a few empty cities that were recently built, that doesn't indicate overbuilding - it indicates that they are planning ahead."

    I have never looked at China's overbuilding from that perspective. My instinct tells me that is a completely absurd and risky move. I would have completed sided with ETFsRule had he not made that statement.

    Tell me - if China is wrong about their "city planning" endeavors, what happens to their GDP then? That question probably doesn't have an answer, let's rephrase: if China is wrong about their future planning, what does that do your thesis regarding China NOT being an overbuilder?

    I'm not saying anyone is right or wrong, but my point is, if China is depending on filling out its infrastructure "if/when the masses show up," then your argument and China's future have been put in a very precarious position.

    Would you move into a city that is 50 years old and has never been maintenanced?

  • Report this Comment On November 08, 2012, at 5:41 PM, TheRealRacc wrote:

    On top of all that - there is no way we have an accurate measure of anything coming into China, leaving China, or being produced in China.

  • Report this Comment On November 08, 2012, at 7:19 PM, ETFsRule wrote:

    "I'm not saying anyone is right or wrong, but my point is, if China is depending on filling out its infrastructure "if/when the masses show up," then your argument and China's future have been put in a very precarious position.

    Would you move into a city that is 50 years old and has never been maintenanced?"

    But, nothing like that is really happening. If there really were a bunch of 50-year old empty cities, then I would be worried.

    And again, I believe a lot of the talk about construction is overstated and misunderstood. The issue can seem more complicated when you get into exchange rates, and the costs of construction in China compared to other countries, etc.

    I find this to be an important figure: China accounts for more than 19% of the world's population, yet they only account for 14% of the world's construction industry (source: The Global Construction 2020 report, March 2011).

  • Report this Comment On November 09, 2012, at 2:05 AM, loaiabduh wrote:

    Long time ago, all big global players (USA, Russia, and China) released that their WARFARE abilities are the reliable resort and guarantee they can count on – especially when it comes to the economic welfare and prosperity.

    USA, for instance, is literally a bankrupt country, though, still they are printing dollars (and they'll continue doing so).

    Where all other countries cover their currencies with a basket of gold, silver, and stable assets, USA is using its muscles (e.g. arsenal, troops, and weapons) to stimulate its financial growth.

    Nowadays, who don't notice the race between USA and China to improve their armies and maintain their attack-first ability?

    In conclusion, we should not worry about the China Economy – as they know very well HOW TO PRINT MONEY.

  • Report this Comment On November 09, 2012, at 3:29 AM, niorbox wrote:

    You may be right if your story was 3 years ago. Today is NOT the time to sell China. Have you noticed a pickup in Oct data. Moderate recovery is underway. Manufacturing PMI, industrial production, retail sales all improved.

  • Report this Comment On November 09, 2012, at 6:31 AM, FreethinkerKW wrote:

    Outstanding piece, Travis!

    I added you to my list of people to "follow" from Motley Fool.

    It just so happens I was looking at the chart for the Shanghai Exchange last night. In technical analytic terms, this monthly chart shows a tight symmetrical triangle. Whichever way the candlesticks break, out to the upside, out to the downside, of the triangle legs will be the dominant trend direction in the near future. My bet is China is going down.

    Unlike many in this thread, I follow China news on the Free For All Macroeconomic Board Here at Fool. You're spot on with your observations. The only thing I would add are the thousands of riots and the corruption of Red Party members and their "enforcers" (Triad gang members) which you made no mention of.

    I'm looking forward to more of your China writing. Here's my monthly chart of the Shanghai Exchange:

    http://stockcharts.com/h-sc/ui?s=$SSEC&p=M&st=1990-0...

  • Report this Comment On November 09, 2012, at 12:35 PM, VentureY wrote:

    China buys 65% of the seaborne Iron Ore because they produce stell for the Chinese market and every other market in the world. Yes there are cities in China built for 12 million people that hardly anyone leaving in them. I read an article and I say the video that showed the city with not traffic any trafic. At the same time you do not expect a consumer that make $5000 per year to afford to buy a $75000 or more apartment.

    Take a look at the American, European, Japanese steel companies the ones that are still operating that is not so many and the ones that are left are not so solid. And that is the reason teh Chinese consume 65% of the seaborne Iron Ore this is the reason.

    I remember when US Steel was a company that was strong and vibrant and all the other US steel manufacturers that have closed and take a look at Europe how many have closed and are closing.

    Four weeks ago ArcelorMittal announced it was selling 40% of its shares to a Chinese partner because they need money and a partner with Chinese connections in the Cina market. ArcelorMittal by far the largest steel producer worwide big difference to the second steel producer in terms of capacity. ArcelorMittal has around 375000 empliyees worlwide, it must be a factor for them to sell 40% of their shares from their North American operations to the Chinese.

    Take a look what the Chinese are buying in terms of Junior Iron Mining companies worlwide and be inofrmed that they know what it takes and they what they are doing.

  • Report this Comment On November 09, 2012, at 12:59 PM, wyrdmage wrote:

    China is riskier than the U.S. but has an associated higher potential of return. While it is unwise to overbalance your basket with the same kind of eggs, it is naive to completely ignore investment opportunities in Chinese stocks for the next 3-10 years from fear that they might not do things the way the U.S does them. They don't, so that's the risk and that's the potential.

    It is my understanding that the Chinese are ultra-savers, and that their government uses "rainy day funds" as a stimulus without borrowing (they don't borrow from us, we borrow from them). They also cheat, but some Chinese companies know how to make money and are a good investment if you choose wisely. I now only buy Asian cars because our cars are not as good as theirs. The world is on their side and beating their doors down to become a part of doing business with them, while we (the U.S.) are making fewer things that the world wants. We will probably overcome our debt problems and remain powerful, and the Chinese people will probably become MORE powerful than they are.

  • Report this Comment On November 09, 2012, at 3:57 PM, rkrasnod wrote:

    Did the authors put any research into this article?

    Did they not read the famous article on the manufacturing of Apple products in China is also related to their unparalleled infrastructure and number of engineers? That Steve Jobs when asked by Obama what the US needed to do to get an American-made iPhone said, "those jobs are gone to China and are not coming back"?

    Where would you rather invest? A bankrupt US that will have a currency crisis sometime in the future, and is effectively soon owned by China? Japan that is a demographic nightmare? Europe, which is growing old and will likely not see real growth again? Or maybe a growing, ambitious country that is generating engineers, scientists, whose government acts in a coordinated manner and has plenty of headroom to grow?

  • Report this Comment On November 11, 2012, at 3:17 AM, anuvaka wrote:

    So we should sell the second largest manufacturer because the govenment is shakey.

    This is not breaking news. China has been this way for years.

  • Report this Comment On January 02, 2013, at 12:11 AM, niorbox wrote:

    16% RALLY in 1 month ... STILL THINK IT's A SELL ????

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