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Jewish World Review Feb. 10, 2005 / 1 Adar I, 5765 Why are the Chinese moving their money out of China? By George Friedman
http://www.JewishWorldReview.com |
Once in a while, I run across statistics that seem unimportant at first, and then suddenly appear amazing. The Chinese government announced this week that Chinese investment overseas rose by 27 percent in 2004, to $3.6 billion dollars. Contracted investment — investment that has been agreed to but has yet found its way overseas — rose by 77.8 percent in 2004.
That seems like a statistic to yawn by, until you think of this: China's economy grew last quarter by over 9 percent. Everybody is talking about China's economy as unstoppable. U.S. investment bankers are scurrying to get their clients into China. Therefore, why would the Chinese be moving their money out of China? If all the forecasts are correct, and I lived in China, the only place I would be investing is at home.
There are two rules in investing. (Actually there are a lot of rules, most of them contradictory, but these two look good.) First, do what the insiders are doing. Sell when they sell. Buy when they by. The second rule is to never buy at the top — and you can tell the top when people who have no business investing are investing and the valuations become insane.
We said it was time for a recession in February 2000 based on two things: Yahoo had developed a larger market capitalization than General Motors, and my wife's hairdresser had gotten seed money from a venture fund for software for scheduling beauty salon appointments.
Last week I received a spam e-mail from a group telling me that it wasn't too late to invest in China and they had several exciting opportunities they wanted to discuss with me — or anyone who'd listen. When the e-mails for enhancing various functions become mixed with e-mails for not missing the last boat to China, it is time to be careful.
China has been growing at an extraordinary rate for almost 30 years. Of late, its growth has simply been preposterous. The "new economy" hadn't abolished the business cycle and neither has China. Certainly, China is an extraordinary place and it may well have an extraordinary future. However, the idea that it can continue growing at these rates indefinitely is absurd. Growing for as long as it has increases the probability of a reversal of fortunes.
There are, in fact, very serious problems in the Chinese economy. The most important problem is its bad debts, which even the Chinese officially admit to being about $150 billion and which is probably much higher. This in turn reflects the fact that capital is not allocated on a market basis in China, but rather politically, based on who you are and whom you know. China is filled with enterprises, state-owned and otherwise, that loses money but are kept afloat by bank credit.
That credit is not nearly as available as before because of the weakness of the Chinese banks. As credit tightens, business failures will increase. Right now, China is surging exports overseas to keep the cash coming in, but it isn't clear that the country is making money off those exports. It's running fast to stay in the same place. A 9 percent growth rate doesn't mean anything until you find out whether the country is making money off that growth rate. I can grow anything quickly if I sell at or below cost.
China is not the first Asian economy to be in this condition. Japan went down to the same disease in the early 1990s, and East and Southeast Asia went down in 1997.
China is late to the game and late to the disease. It is interesting that Japan and East Asia had the same disease. They all had mountainous bad debts and a banking system that was nearly crippled, massive exports that were not particularly profitable and capital flight, where Japanese, for example, bought everything and anything so long as it wasn't in Japan.
Interestingly, the media gushed over Japan in 1990 and Asia in 1997 the same way they are gushing over China now. They misinterpreted cheap export surges as healthy and the flight of capital out of these countries as a sign of strength. The same thing is happening with China. And like Japan and Taiwan, China has huge dollar reserves — yet which are not used to fix the unfixable financial system.
Between the dogma that China is a sure thing, people trying to invest in China who have no business investing in China, and a complete indifference to any facts that indicate the contrary, China looks as toppy as NASDAQ did in 2000. This is not knocking China. It has put on an impressive show and will be a major player in the future.
But everything needs to cool down, and the longer you wait, the more chilling the bath.
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George Friedman is chairman of Strategic Forecasting, Inc., dubbed by Barron's as "The Shadow CIA," it's one of the world's leading global intelligence firms, providing clients with geopolitical analysis and industry and country forecasts to mitigate risk and identify opportunities. Stratfor's clients include Fortune 500 companies and major governments.
© 2005 TMS
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