Best Of MetalMiner: 10 Reasons To Short China

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Best of MetalMiner

Taking our recent coverage on China into account, we decided that one of MetalMiner’s best-read posts of the summer was quite apt:

10 Reasons To Short China: Part One

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-a-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 ‘middle 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.

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