10 Reasons To Short China – Part One

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I’m reminded of Thomas Friedman’s famous quote from his book, “The Lexus and the Olive Tree “Buy Taiwan, Hold Italy, Sell France. Never one to accept conventional wisdom, I try to look in some less-than-obvious places for information that makes me challenge my own assumptions. And like some of you, I change my mind from time to time (becoming less “pro-free trade as they say because of the obvious skewing of how trade rules apply to various goods produced by various countries) and so have titled this post accordingly. And being a person more interested in the social sciences vs. the hard sciences, I like to look beyond the numbers and speak to the proverbial man on the street to augment and/or challenge some of those assumptions.

One assumption I have begun to challenge (reminiscent of Mark Twain’s quote,  “The reports of my death have been greatly exaggerated) suggests to me that the notion of China taking the lead over the US in terms of (fill in the blank) power appear premature.

In short, I have begun to rethink my position on China vis-à-vis one assumption that all commodity markets, nearly all media and just about every economic pundit have made. The assumption that the Chinese middle class is growing and will continue to grow has given me pause to rethink that view. Because we don’t have the space or the time to properly define the middle class, we refer to this chart published in February, 2009, defining China’s middle class:

Source: The Economist

Further still, we borrow this definition of the middle class, also from the Economist: “The new middle consists of people with about a third of their income left for discretionary spending after providing basic food and shelter. The article discusses China’s middle class and suggested back in 2009 that economic conditions can turn both ways. “Those at the bottom of the ladder do not have far to fall. But what happens if you have clambered up a few rungs, joined the new middle class and now face the prospect of slipping back into poverty?

The anecdotal evidence we have gathered suggests it is possible that this may now be happening.

Here are 10 Reasons Why We Doubt China’s Ascendancy:

  1. The rise of “Maternity Tourism For reference, the other country that practices Maternity Tourism is Mexico. A baby born on US soil becomes a US citizen at 21 if his/her parents are not US citizens. It’s why places like El Paso, and other US border cities have such as high number of non-resident births. Why would well-to-do Chinese mothers be coming to the US to give birth, then?
  2. Gas prices in China are more expensive than gas prices in the US and that is not on a PPP (purchase price parity) basis, but on an actual dollars per gallon basis. Consider this: Shanghai gas prices as of Friday June 10 were: 8.5 RMB/liter = $1.31 per liter (3.785 liters to the gallon) = $4.96 per gallon.
  3. The real estate bubble may be popping and will harm not only the consumer market in China, but countries that export to China. The WSJ coverage includes discussion of plunging excavator sales within China as an example (we can write an entire post on the potential impact of popping the China housing bubble)
  4. Rising taxes have harmed Chinese small businesses and factories. Two months ago truckers in Shanghai went on strike protesting taxes and fees
  5. Many factories geared for exports have closed and will never come back
  6. Rising inflation has caused serious problems and this pundit also shorts China
  7. Chinese citizens have taken to micro-blogging where some political content can only be accessed through an ID and password, though one of our contacts confirmed the government routinely edits content it doesn’t like
  8. Follow the money. We asked another contact where the wealthy have parked their dollars. The reply we received, “outside of China, followed by “Yes, I want to leave and take my kids to learn in another country if I can afford to (this from someone who clearly falls into China’s Ëœmiddle class’)
  9. After 30 years of China’s one-child policy, the birthrate now stands at 120 boys for every 100 girls. “When there are more men than women, social instability and crime increases in society,” said Valerie Hudson of BYU.
  10. We won’t even touch the issues of environment, government corruption, falling water levels on key trade routes, water shortages or China’s currency peg (those have been touched on by my colleagues already).

We’ll share our thoughts on what a “Short China scenario might mean for global metals markets in a follow-up post.

–Lisa Reisman

Comments (9)

  1. Rob says:

    Lisa,

    What you fail to take into consideration in your article is that China is the largest creditor nation in the world and the U.S. is the largest debtor nation in the history of the world. While I agree there will be setbacks China I believe will still overtake the United States as the number 1 economy. In short, as they continue to purchase and natural resources from all over the world to offset treasury losses they are positioning themselves to be a dominant global force.

    The Middle Kingdom has had many periods of greatness compared to the short lived history of the United States. China, I believe is on the rise again for the reasons I mentioned in my previous paragraph. The United States will have to deal with being number 2. Who knows if Japan can ever get its house in order the United States may slip to number 3.

    Regards,

    Rob

  2. Brad Janetstein says:

    11. Worst drought in over 100 years causes water levels behind Three Gorges Dam to fall. Dam generators are a different elevations; as the water falls more get cut off. Hydropower production is cheap and completely domestic relative to coal and petroleum. The loss of hydropower therefore eliminates de-facto energy subsidies. Electric power producers have been regulated into becoming price takers but this loss of subsidies makes it impossible to continue producing. Minimal adjustments to the price of electricity are offset by coal shortages caused by crises in Australia, Mongolia, South Africa. This crisis has also expanded to impact fertilizer prices in China which have soared nearly 10% over the past month, lifted by the impact of power cuts in lowering output last month by 1.25m tonnes, compared with May 2010. Fertilizer production in Hubei, a smaller providing province, “has almost entirely shut down due to electricity shortages, while other regions… are experiencing varying degrees of production curtailments”, according to Chinese reports.

    12. Riots. In the latest disturbance, armed police were struggling to restore order in a manufacturing town in southern China Monday after deploying tear gas and armored vehicles against hundreds of migrant workers who overturned police cars, smashed windows and torched government buildings there the night before. The protests, which began Friday night in Zengcheng, in the southern province of Guangdong, followed serious rioting in another city in central China last week, plus bomb attacks on government facilities in two other cities in the past three weeks, and ethnic unrest in the northern region of Inner Mongolia last month.

  3. Fali Roowalla says:

    I do not understand how so many Chinese middle class are travelling all around the Globe. I see them by the bus loads most every weekend in the Southern Towns of Switzerland. They and Indians are the most familiar faces these days in Switzerland (although Switzerland is expensive and is keeping a lot of Americans and even Europeans out but Chinese and Indian tourists are seen in greater numbers). How come so many of them can afford to spend in one of the most expensive tourist resorts in the World especially with the Swiss Franc where it is.
    The Maternity Tourism could be a isolated case. There are many who wish to live out of their own countries and that goes for the rich American citizens to find other countries as their tax haven. One always find people such people who get sick of their own countries and wish to see the other side of the hill which they think is greener.
    I know a friend of mine who after living some 10 years in the U.S. returned back to Europe – couldn’t get accustomed to the U.S.life style .

    But I don’t say that all those who go to the U.S. want to leave especially those who are from the emerging markets.
    Fali

  4. Mark says:

    The US still has an ace in the hole, which is the liberty of its people and the freedom to challenge its government. The American people have the ability to rise up and demand a more favorable environment in which to live and do business. Critisism of the US Govt by its citizens is a cultural norm and expected. Lack of freedom will limit China’s rise. By it’s tight control of the limitless potential of its people, the Chinese govt relegates them to permanent 2nd place, at least on a per capita basis. Do to their size, they could top the US in GDP, but then divide by the populas. The US will bury them in such a comparison for decades.

  5. admin says:

    Thanks everyone for your alternative viewpoints. The point of the article is merely to do just this – spur debate and discussion. I just try to balance what I read with what people who live there are saying and I see a dichotomy. Anecdotal for sure but if we did a poll of the newly minted middle class what would we learn? LAR

  6. Peter Leg says:

    I live in a big city in China and this place is full on. Before i go in the supermarket i check to see if i can get out and that usually means if there are more than 10 people waiting at the checkouts i come back another time. Also the subway or metro is so crowded you can hardly get on let alone get off. The restaurant we go too opens at about 10 o clock and we get there about then and when we leave about 11 o clock there are people lining up outside to get in. I’ve seen articles about the malls where the shops haven’t been sold but what about the malls that are so crowded you can hardly get in. I can’t see China collapsing anytime soon. The momentum will carry it forward for years to come. I would say the US could collapse before China. I think China will be the last big country standing. There are more problems in the US and Europe than in China

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