Thursday, 14 January 2010

Not Shorting China

Thomas Friedman says in the New York times*

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves
before going onto list the potential of China's enormous population to benefit from the crash industrialisation and infrastructure building that has been going on for the past couple of decades. Bill Gates' quote
In China, when you’re one-in-a-million, there are 1,300 other people just like you.
gets another airing. Of course china is a country with VAST potential. But the assumption that China is the next Hegemonic superpower seems lazy to me. Remember they have a population an order of magnitude larger than our own, but have only just passed the UK in total size of the economy (with a little help from our ex-chancellor nobbling ours). They may be catching up fast, but there is still a LONG way to go. Both economically and militarily, China is still dwarfed by the USA.

If you look at history, one of the first things that unites almost all hegemonic powers is a young, growing population. Unlike Britain in the 19th century and America in the 20th, China's population will be falling and ageing by the time the country is ready to start asserting itself.

Then there is the politics. China is a grubby totalitarian shit-hole which executes more people in a month than the rest of the world does in a year. The kind of place where the ruling party can attempt something obscene as a one-child policy, and worse: succeed. It's a one-party state, which censors the Internet denies free speech to its citizens. This enables it to conduct genocidal campaigns against ethnic minorities and not get caught. The fact that it is nominally a communist country too ensures an easy ride in the western press, because unlike that Nasty Mr. Pinochet, the communists say they're on the side of the Worker (whilst shooting him in the back of the head for owning a pig).

Dictatorships of any colour rarely create mass affluence (Pinochet being a notable exception): As the Chinese middle class grows, they will increasingly demand political representation to reflect their economic power. At present, the Communist party is delivering growth, and buying off the demands for greater political participation, but at the cost of all the principles of communism (except the mass-murder, naturally). Once the growth goes, so does the will of the people to sweep the political totalitarianism under the carpet.

Of course the advantage of being a communist totalitarian state is that you can hide civil unrest from the eyes of jittery investors. The 2009 riots in Xinjiang were reported because these stemmed from inter-ethnic tension - a bee in the bonnet of the western media, especially as the disaffected troublemakers were Muslims. But riots over jobs in the vast factory towns of the South East of the country in the same year were not reported on the television news and received little coverage elsewhere. Few westerners go to places like Dongguan. The Chinese communist party has now hitched its wagon to economic development, and has to deliver. Like our own socialist government, I am sure they are not above massaging a statistic or two to keep the western FDI flowing.

How, or indeed if, the Chinese communist party handles the transition from totalitarian toilet to pluralist democracy will determine how, when and to what extent China reaches its potential. By contrast the other vast, rapidly industrialising state, India for all it's chaos, strife, poverty and corruption, is already a democracy, and doesn't need a revolution. Which is why my money is on India for the long-term. I'm not sure I would short China, but I will bet on bet on the Real Tiger rather than the Mythical Dragon.



Krauser said...

As the Japanese say: "China has been underperforming for 1,000 years. What's changed?"

China is screwed. Check Mish's blog for good details. It's just a bigger version of Dubai when it comes to speculation, especially on property. Inflation is totally out of control.

But the biggest problem is that it's socialist, and therefore guaranteed to collapse. Capital allocation decisions are more statist now than under Mao. It has the same targets culture as the UK, but for GDP per region.

I'm predicting collapse and civil war within 5 years.

ma said...

"But the assumption that China is the next Hedgemonic superpower seems lazy to me."

My dear friend, I disagree.

I do believe that China will be a hedgemonic super power, as they have to power to buy many many hedges.

Will they be the next hegemonic super power? Probably not.

Jackart said...

Damn you with your spelling accuracy...

ma said...

You know you love it.

Idle Pen Pusher said...

Great post, Mr Jackart. Agree pretty much 100%. Not quite though, as I think there's an outside chance of a peaceful, gentle shift to greater political freedoms as the population becomes richer, cleverer, and therefore more concerned with such 'luxuries'. India might therefore never catch up with China.

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