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Tuesday, June 30, 2009

China view change

My long term view is China will be the economy driver of the world, mainly due to the sheer number of people entering into the world economy.

However, China has some significant problems, some so severe I question whether China will be the world economy driver in the next 5 years, or pushed out much further.

Lets look at what we know about China.

1) The information on it's economy is much more blatantly manipulated that the US. It is a communist country where the central government "dictates" published results. The US, while very manipulated, isn't in the same league as China. Dis-information is NOT a good place for investment or relying on world finance. America has it's own disinformation, called MBS (mortgage backed securities) and CDS (Credit Default Swaps).

2) The real estate boom in China makes America look like small potatoes. In Bejing alone, there is an estimated 100 Million square feet of VACANT office space. (Manhattan has 500 million square feet in TOTAL) Further, many spaces are priced at multiples higher than what a upper middle class person in China makes (like a doctor). Example: Apartments go for $800,000, average Chinese salary is 6K. Office space vacancy rate estimated 18% (NYT)

3) China is desperate to take world lead and continues to bash the US at every step. This desire to be world economic leader has it's merits as I have pointed out. However, this has lead China to instruct their banks to lend money and in general be fiscally irresponsible, to the tune of 1 TRILLION dollars since December!

4) China refuses to fail anywhere. This mentality has produced a nation encourages it's banks to NOT WRITE DOWN ANY BAD LOANS. Think US banks are insolvent? I do, but who knows with China. Atleast in America we know which banks in the US are insolvent but we pretend they aren't. China, who knows which are.

For a really great long running rant from Zero Hedge on China being down for the count for the next 20+ years click here.

In any event, this is distrurbing, one of my hopes is in the next 2-5 years the world economy would start to turn around due to the emerging markets. With China having millions flee cities due to lack of work, the country facing civil unrest, it is looking more and more like China is not going to pull the world out of the economic funk.

This is good news sort of for America, since the world will be forced to prop up the US. There just isn't a better alternative yet. Reminds me of my voting pattern, vote for the politician you hate less, but you still don't like either choice.

What concerns me the most is what China will do if enough civil unrest materializes to challenge the established government. If I had to guess, China would demonize America as the root of their evils, like all other countries do. I hope this is just a crazy thought.

Bottom line: We will continue to see resource fluctuations, stock market volatility, and a VERY long term problem in the world.

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