by Jeannette Di Louie, Investment U Research
Tuesday, November 29, 2011
Once upon a time, the term BRIC meant something. Brazil, Russia, India and China were all seen as rising stars in the global economy, and investors couldn’t get enough of them.
Not so much anymore. These days, only China seems to make the news.
Admittedly, there’s some good reason for that. The Chinese economy has grown by leaps and bounds for years now, and its political sway seems to be increasing just as quickly.
Just this month, U.S. President Obama refused to make a decision on Iran’s nuclear aspirations before he spoke to Chinese leaders. No wonder many economists predict China will surpass the United States as the world’s largest economy in less than 20 years.
Then again, economists and amateurs alike have made similar predictions for quite a while now. And while China might have another several strong years left in it, investors still might want to consider a different perspective on the communist country before they shift all of their money into it just like that.
Jim Chanos Sees China As the Next Enron
Trying to find a bearish opinion on China may seem like asking Congress’ so-called Supercommittee to get along, but it’s not nearly so difficult if you know where to look.
Take Jim Chanos, the short seller who famously predicted Enron’s collapse and the fall of the U.S. housing market. He’s publicly stated his opinion repeatedly that “China is heading for a fall”… and a big one at that.
“The property crash in China will be worse than it was in America or the U.K.,” he foretold back in February, after making similar predictions in 2010.
Don’t shrug off his prediction lightly just because it’s practically 2012. After all, Chanos first began shorting the U.S. housing market in 2005, well before anybody else had a clue about its imminent collapse.
Meanwhile, national security analyst Tom Barnett also believes China has a rocky future ahead of it due to “a lot of developmental walls” the country has built up in its own way. And Troy Parfitt, author of Why China Will Never Rule the World, completely agrees, saying that, “China lacks superpower qualities and hasn’t discovered any in its mad dash into capitalism.”
The Facts Don’t Bode Well for China
Three China bears against the likes of Jim Rogers, Mark Mobius, George Soros and practically every Tom, Dick and Harry around may not seem very impressive at first.
But isn’t that partially the point?
In the 1980s, everybody knew that Japan would surpass the United States as the next big superpower. During the 1990s into the 2000s, everybody was certain that real estate had only one place to go: up. And at one point or another, everybody thought that investing in Worldcom, Enron and Lehman Brothers were safe, sure-thing plays.
In other words, “everybody” gets its wrong far too often. And when it comes to China, “everybody” is missing several key facts that don’t bode well for the country…
- One-child policy: As Barnett points out, China’s forced family planning over the last 30 years is now officially coming back to haunt it: “By the time they hit 2050, they’re going to have more old people than the United States has people [period].” In other words, workers will be scarce – and therefore expensive – and elderly dependents far too common for the younger generation to support.
- Continuing socialism: Sure, the country seems to be embracing all the best of capitalism, vaulting thousands of its working poor into its ever-expanding middle-class every month. But it’s still ruled with a heavy hand and strict regulations on personal freedom that don’t lend well to long-term ingenuity or social stability.
- Unhappy populace: For every citizen catapulted out of poverty, there are still far more left wallowing in it. And you can better believe that lengthy list of have-nots leads to a lot more violence and strikes than the Western world hears about.
- Pollution problem: In a desperate bid to catch up to the world’s economic players, the Chinese government has gone overboard building up its cities. The New York Times reported in June that “the Rapid growth of megacities… has drained underground aquifers that took millenniums to fill.” That has also led to an intolerable amount of air and water pollution, with all of the health risks involved.
A Final Caution on China
Perhaps the U.K.’s Telegraph said it best when it summarized acclaimed author Xué Xinran’s opinion of China’s future outlook:
“Its young are incapable, its old are exhausted and box-ticking bureaucrats make life hell. China, a superpower? First, it needs to grow up.”
That’s not to say that investing in the Asian tiger right now isn’t a good idea.
More than likely, the global economy will remain far too consumed with European and American financial woes well into next year, if not beyond. And that means negative focus will stay off of China for the time being.
Just keep in mind that the country’s long-term prospects aren’t nearly as rosy as China bulls want to believe. By now, the investing community should know better than that…
Nothing ever is.
Good investing,
Jeannette Di Louie
Article by Investment U
