Is China a Bubble?

In any major trend, you’ll have intelligent people argue both sides. Nowhere is this tendency more apparent than in the debate over the rise of China. I believe China, and to a lesser extent Asia, is still the big story for the next couple of decades. This is a long-term cyclical shift in power from West to East. China turned inward in the 15th century and became complacent at the same time the Western world was driven to improve their lives. These roles that have persisted for centuries have now reversed.

In forecasting the future, I try to focus on things I can’t be wrong about, which is why I focus so much on demographics. The demographic situation is generally bullish for Asia and the Middle East and bearish for the Western world. Not only are favorable demographics supportive of the future workforce in absolute terms, but the youth of the world are better equipped to utilize the internet and new technologies. Even in a relatively poor nation like Egypt, we are seeing how new technologies are being integrated into everyday life. I still think we are at the tip of the iceberg of where technology can take us. When you look at the growth curve of things like processing power and bandwith, it is exponential. This is a future I am not sure the Western world is ready for.

But before I make a couple of arguments for China, I urge you to watch the embedded interview with Jim Chanos, who I consider a very skilled hedge fund manager. He is bearish on China in general and the Chinese property market in particular. His argument basically centers around the outsized portion of GDP that housing occupies.

Chanos makes good quantitative comparisons between the Chinese property market today and the bubble U.S. housing market. However, China’s middle class is still growing, not contracting. Let’s estimate that China has a middle class of about 150 million. By some estimates, the middle class in China is poised to reach 700 million by 2020. In effect, the middle class is projected to grow by more than the current population of the United States in the next decade. The middle class in China will grow about 5x in the next decade. I can tell you this was not the outlook for the U.S. from 2000-2010. China needs houses. Not only that, but I can say with a high degree of certainty that capital investment will flood to China once they open up their markets more. Immigration trends will likely shift towards Asia. People follow the money.

Infrastructure

The infrastructure in America is pretty dated. In a crude way, our prior innovation and quality in construction is now weighing us down. For example, the subway system in New York City is serviceable, but what we need is a complete makeover. Ironically, it would have been better if construction was a little shoddier so we could move on. This is a clear advantage Asia has over us- they can build infrastructure according to the most modern advancements in engineering and technology. This is why China has high speed rail and we have…Amtrak.

Since Asia is building modern infrastructure, their growth curves are going to benefit. Their young populations will drive innovation. As for the U.S., we will have to rebuild our infrastructure at the same time we have a debt crisis and an aging population. While the Chinese are buying gold no doubt in preparation for a new currency arrangement, the U.S. is buying its own Treasuries and paying the interest to the Chinese. Tell me, whose future should I be more bullish on? If I were a betting man, I would bet on China. Huge corrections are probably coming in China, but this is a growth story that is far from over.