Bad news is good news — the challenge of the Chinese economy
Bad news is good news — the challenge of the Chinese economy
Too much of a good thing invariably turns out to be a bad thing.
But that in turn can be good news — at least for some.
The shift in global economic power is not working out in favour of the western world. And it’s not liable to do so in the foreseeable future.
But the anxiety generated by this state of affairs can be a boon to those who accumulate gold and invest in metal stocks.
That in a nutshell is the conclusion of Mr. John Kaiser in the Bottom-Fish Action Report. But this is a nutshell that requires some explaining.
Mr. Kaiser, who lives and works in California, is a Canadian by birth and education, and he closely follows Canadian junior resource stocks.
As he watches resources make their way to an ever-growing Chinese economy, he has developed firm views on the enormous changes this has wrought — changes that have taken many by surprise.
Destructive implications
While he favours the free movement of capital, Mr. Kaiser differs from many of his fellow investment editors in his belief that it can get out of hand.
The resource sector flourished from 2003 to 2008 as productive capacity switched to China. This was made possible by Mr. Alan Greenspan’s low interest rate policy and the real estate bubble that fuelled the consumption binge that lapped up all those made-in-China goods.
But it was also made possible, Mr. Kaiser says, “by the triumph of ‘free-market capitalism’ which in the wake of the collapse of the Soviet Union enabled the owners of capital to mobilize their capital anywhere on the market.
“While in principle I think it is a good thing to allow capital to seek out the best profit opportunity, the Chinese Anomaly that circumstances presented has turned out to be too much of a good thing, which has destructive implications for the OECD, otherwise known as the modern western world.”
The Chinese Anomaly
What exactly is the Chinese Anomaly? Simply this. The country with the world’s largest population, which had suffered horribly under Communism, got a chance to “serve the westerners whose fat per capita standard of living vastly exceeded the meager Chinese standard of living.”
Under Deng Xiao Ping, hundreds of millions of Chinese peasants were allowed to migrate to the coastal plains, where western capitalists were allowed to build factories to put this cheap labour to work.
Under both presidents Clinton and Bush, says Mr. Kaiser, the U.S. agreed to overlook the poor working conditions in China “if China agreed to confiscate the export dollars received by Chinese producers in exchange for freshly printed renmibi, and ship those dollars back to the United States in exchange for debt instruments such as U.S. treasury bills.”
The tradeoff would come when a wealthier China produced a middle class that would create vast new markets for the factories controlled by westerners. Thus the trade imbalance would be put right again.
In addition, the west assumed that the communications revolution (i.e., the Internet) would undermine the centralized communist leadership.
It hasn’t worked out that way.
After the Civil War
China figured out how to absorb western technology, clone western factories and bypass western ownership in China.
As for the Internet, the Chinese may lack the “sophistication” of the western approach to censorship — “by allowing everything to be available to such an extent that nothing matters,” Mr. Kaiser comments sarcastically. But they have been adept at erecting an old-school system of censorship that restricts what its citizens can view, on Google or elsewhere.
The real upheaval in the economic balance between east and west came with the crash of 2008, he explains. All of a sudden, the west could no longer bankroll its consumption of Chinese imports through credit.
But China reacted quickly. It put its enormous foreign resources to work creating a $586 billion fiscal stimulus program. Much of it poured into energy and transportation for an inland population eager to head to the coast, where the greatest economic opportunities lie.
Indeed, the editor compares this to the United States after the Civil War. Realizing it could no longer count on the European export economy for its own growth, it got to work building more roads, railroads and canals.
Many still don’t grasp the implications of this development, he adds.
No chance of competing
China has developed a policy of self-reliance, Mr. Kaiser states, and America has “far too high a per capita standard of living to have any chance of competing with the Chinese in the sort of economic free-for-all required by the principles of free-market globalization.”
Among other things, this may lead to a bitter battle over the supply of metals — and that may not follow the good old free market path, either.
In time, Mr. Kaiser believes, many metals “will be produced with pre-determined destinations whose delivery will bypass the market which everybody has come to take for granted.”
This would not be welcome news for those who expect the traditional rhythms of supply and demand to go on without interruption.
But this bad news could actually be good news for those who are alert to the changes.
First, this will encourage the accumulation of gold with “intensifying urgency,” the editor says.
Second, “the re-emergence of an economic Cold War will encourage asset buyouts at surprising valuations based more on strategic than economic logic.”
Those who have invested in metals may yet benefit from such “surprising” buyouts.
This is one man’s view of the economic future. No one can foresee precisely how things will turn out, but it would seem unwise to assume that the world will simply settle back into the same economic patterns.
Stay tuned, Mr. Kaiser tells his readers. In this case, the old saying, “The more things change, the more they remain the same” may not apply.
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