Civil War in China (Part II)
- Jun 03, 2011
- admin
- Investing
Let me begin today by thanking every one of you who commented on last weeks article on China. Whether you agreed with the article or not, I do appreciate you taking the time out of your busy day to share your comments. Having been raised in a family that furiously debated subjects like politics and economics every night at the dinner table, I’ve always enjoyed a strong and thoughtful debate. I was taught from an early age that if you dish it out, you have to be able to take it.
Unfortunately, however, two readers attacked my integrity and I thought it was important to address them before I continue with today’s article:
Somebody named “Paninder” said: “This is silly article…why should there be an civil war due to few structural problems… I find this article to be an mischievous work of some people who are against China’s growth.. one should always realize that it is better for world if China is stable and prosperous..lets not wish any bad for any nation…”
While a person named “FRANCIS” said: “I would have put Tycoon above fear mongering and pandering to those that look forward to China’s decline.”
Out of respect I’m just going to assume your work for the Chinese government and it’s your job to patrol the internet say such silly, narrow-minded and meaningless things in response to any article that can be perceived, however incorrectly, as China “bashing.” I know I’d have no problem writing things like this if there was a gun pointed to my head.
But if I’m wrong and you don’t work for the Chinese government then, as the co-founder of an investment education company, I have an obligation to help you due to the severity of your symptoms. You see, both comments imply a particularly virulent strain of narrow-mindedness that I’ve come to call “Mad Cow Syndrome.” Unlike Mad Cow Disease, which attacks your body, Mad Cow Syndrome attacks your mind until, ultimately, you become a card-carrying member of the “Herd.” Here’s the way this insidious syndrome works: a person hears something over and over and over again until, at some point, he begins to accept it as Gospel truth.
(See: Housing Bubble, Dot Com Bubble for a recent example).
In this particular case it’s understandable: for at least the past decade, almost everyone in the press in both America and across the globe has come to believe that China is unstoppable. It has now become the “conventional wisdom” of virtually everyone who every brings up the subject of China. Authoritarian governments around the world are sending teams of people into China to find their secret…to master and introduce into their societies China’s new, unstoppable way of doing things.
What’s so dangerous about Mad Cow Syndrome is how harmful it can be to an investor. Whenever people begin to accept what’s been repeated over and over again as conventional wisdom , they tend to stop considering alternative points of view. For example, most people I know who swear that China is unstoppable have never even visited the country, let alone studied the history of the civilization (as well as the history of civilizations in general). Oftentimes, they can’t even name the top leaders in the country nor the political system that chooses them. In other words, they just accept the ridiculous notion that China has every strength in the’ve heard about but none of the weaknesses.
In its most virulent form, Mad Cow Syndrome attacks any messenger of new facts or alternative viewpoints by accusing the messenger of an ulterior motive. In this case, both people accused me of “fear mongering” while implying that I was wishing “bad” for China. The possibility that I could have gathered enough facts on my own to draw a conclusion different then the conventional wisdom never even crossed their mind.
(See: www.TheTycoonReport.com for articles I wrote predicting the housing crash in late 2006 or articles like the one I wrote predicting the coming collapse of Wachovia Bank. As longtime Tycoon Report readers know first hand, the list of articles I’ve written about the housing market and mortgage companies is quite a long one. And in each and every article ever written there are always a few folks with severe cases of Mad Cow Syndrome who accused me of having an ulterior motive or questionable intentions. Like these two commentators, it never occurred to many of those readers that I just may have access to more information then did and m reasoning was sound).
What I’m about to say I’m saying out of genuine concern: if, as an investor, you find yourself closed off to the introduction of new facts beware. This is a terrific danger sign and I’ve seen it ruin people financially which I don’t want to see happen to you.
Challenge my arguments. Debate me. Ask me to make a better case if you’re unconvinced with something I’ve said. But to accuse my article of being “the mischievous work of some people who are against China” is as ridiculous as accusing me of predicting rain.
Now back to “Civil War in China (Part II)…..
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Last week I began to lay out my arguments explaining that China’s problems are as immense as the population its. To illustrate the point, I offered an example taken right from the front page of the New York Times just two days earlier. It was a story about how China’s ruling class (its politicians) is trying to force it’s business class (in this case an energy company) to cap the prices it chargers to sell electricity to its own customers.
On its own the story itself isn’t newsworthy. This kind of stuff happens all the time in China. What made this particular story newsworthy was that, for the very first time, the company is fighting the government in a very public way. Instead of capping the electricity rates it charges its customers the company is cutting off electricity to the city every 3rd day. In other words, the company is saying that we can only send the amount of electricity people can actually pay for. Not one kilowatt more or one kilowatt less.
It’s a great microcosm of the fundamental flaws in China’s much-heralded “new political-economic model.” Why? Because China’s growth has been based largely on the adoption of “Western-style” capitalism. And “Western-style” capitalism is all about driving shareholder profits.
For years, decades even, China has not only encouraged the adoption of Western-style capitalism, it’s bet its entire future on it. For example,
(1) China regularly encourages business leaders to travel overseas to study their western counterparts;
(2) It encourages tens of thousands of students each year to study business in Western schools so they can come back to China and become the nations future business leaders.
(3) It offers tremendous incentives to successful Chinese entrepreneurs who live overseas in places like Silicon Valley to come back home and help bring China to her former glory.
(4) It forces Western partners who want to do business in China to share their management methods (as well as their technical know-how and many other things).
(5) Lastly, but most importantly, China pushed hard to get accepted into the World Trade Organization (WTO) in 1999. To gain entry, they had to convince the world they would adopt Western-style business practices. They had to convince the world that they would open their markets to competition. And finally, they had to convince the world that they would honor shareholders/owners of foreign companies doing business there.
No Western-style company in its right mind would have invested in China if they felt the government could come in any day and start calling the shooter by telling them how to spend their own money. And let’s face it – it was entry into the WTO that set them on this tremendous growth spurt in the first place.
The Times They Are A Changin’
Mike Tyson famously once said that “Everyone has a plan till they get punched in the face.” Next week I’m going to discuss the specific challenges facing China and why, in my view, the country is at a crucial moment in its history.
Here’s a sneak peek:
(1) Inflation: The leader of the energy company I mentioned at the beginning of this story knows this – that’s why he can’t sell electricity for less then it costs to produce. The reason his company – and thousands of other Chinese companies – have to begin raising prices is because inflation. But China’s leaders want the companies themselves to absorb all the costs of inflation so they don’t pass it onto the rural population (who hasn’t shared in much of the Western-style upside yet).
In this way they face a pickle: force thousands of companies to eat the cost of inflation and go broke in the process or allow them to pass the cost increase to their customers. Either way, a large segment of the population is about to become very mad at China’s government.
(2) New Generation: In the past decade China went on a great effort to privatize companies formally owned and operated by the government. While the transition is far from over, one thing is clear – the old guard is retiring and a new group of fully Western-trained capitalists have been brought in to run these companies. And there’s one thing they know for sure – there is no way they’ll be able to compete internationally unless their able to make investment decisions without interference from the government.
Yet as they look around they see two sets of rules: one set of rules for foreign companies (that keeps China’s government out of investment decisions) and another set of rules for Chinese companies (whatever the government tells you to invest in you have to invest in, even if its just to lower the unemployment rate to keep pressure off the government)
(3) Bad Investments: The torrid growth that has come from these efforts has covered a lot of weak spots. Human nature is human nature. A bureaucrat in China is the same as one in America. And if there is one thing every capitalist knows its that a bureaucrat can’t spend money efficiently. He’s not trained as a businessperson he’s trained as a government employee. Yet it’s been bureaucrats who spent trillions making business decisions propping up banks, keeping bankrupt companies alive just so unemployment doesn’t increase, and so on.
Bottom Line: If you think Washington Mutual or Wachovia Bank didn’t know how to make good loans you could only imagine how many bad loans there are on the books of the Chinese government.
Unfortunately, I’ve run out of time today. But there’s plenty more coming next week in my final article in this series.