In the 1979 movie The China Syndrome, Jack Lemmon plays Jack Godell, a supervisor at a nuclear power plant. The facility experienced “unusual vibrations” and Jack was concerned about a potential meltdown.
Today, many believe that China – a country with the world’s second largest economy – may be on the verge of a “financial” meltdown. Is China on the verge of a crisis?
Has its unprecedented economic growth set the stage for a severe decline? In this article, we’ll look at China’s situation over the past two decades.
The Chinese Economy: A Retrospective View
China has sported an unusually high GDP since the early 1990s. As the chart below illustrates, China’s annual rate of GDP has been 6.0% or greater during the past two decades and has exceeded 10% on many occasions. That’s quite an accomplishment, especially since the rest of the world has experienced several recessions and a near meltdown in 2008. How did China escape the economic contractions? How has it managed such a high rate of GDP with benign inflation? Typically, when GDP is high, inflation is as well. But China is anything but typical.
Chinese Economic Medicine
Let’s begin with the question: How has China managed to escape what the rest of the world has not? Although this may not be the sole reason, China has spent a tremendous amount of money on construction projects in the past few decades.
In fact, what China has erected have been dubbed “ghost cities,” entire cities filled with structures that were built and sold, yet remain unoccupied. (To view a brief video clip on this from the CBS CBS +1.77% program 60 Minutes, Click Here). I have also confirmed this with a few clients who have recently traveled to China.
Private ownership of houses and other lawful property in China is a relatively recent occurrence. When the PRC amended its constitution in 2004, it designated these properties as private property and paved the way for an economic boom. How? Because the amended constitution protects the right of the individual to own property. Given China’s burgeoning population of nearly 1.4 billion people, the floodgate was opened to a very large number of potential home buyers that provided an economic boost.
Real estate has been a popular investment in China, outpacing inflation on a consistent basis. Because many in China believed housing prices would always rise, demand spiked, fueling fears of a Chinese housing bubble. When you think about it, that’s the same type of thinking that contributed to the U.S. housing bubble in 2008. Indeed, housing prices in China did rise for several years. However, the winds of change began to blow in September 2014 as housing prices, on a year/year basis, began to fall (see chart below).
As the chart makes clear, not only did housing prices begin to decline, but the rate of descent has been accelerating. If the air is let out of the bubble slowly, China may not experience a sudden jolt. That’s housing, but what about stocks?
Chinese Stocks: Another Bubble?
Investing in the Chinese stock market is definitely not for the faint of heart. In the following chart, when you compare China A Shares to the S&P 500 Index, it’s clear that Chinese stocks are much more volatile, even though both indexes are market-cap weighted. Given the history of stock prices, you could say that China A Shares are very bubble-eske!
The chart also reveals how Chinese stocks tend to rise and fall with great rapidity. After rising roughly 486% from its bottom, to its peak in October 2007, the other side of the mountain was nearly straight down. From the peak, stocks fell about 72% in only 13 months (i.e. Oct ’07 to Nov ’08). From its bottom in July 2013, the index is currently up over 122% through April 22, 2015. The S&P 500 Index (orange line) actually looks more like an intermediate-term bond fund than a stock index next to the China A Shares. Is another steep decline ahead? I would almost bet on it, that is, if I were a betting man.
China is a very unique place. I do find it difficult to believe that China’s GDP continued to rise uninterrupted between 2006 and 2009, during one of the darkest economic periods of the past 100 years.
Can we trust the numbers? I’ll let you draw your own conclusions on that one. With the ghost cities possibly behind them, and exports beginning to soften, it’s quite possible that China will hit a rough patch as the government attempts a soft landing.
Of course, they are a resourceful bunch and if there’s a way to avert a slowdown, they may just be able to find it, even if it does involve fuzzy math. With the rest of the global economies slowing except, perhaps, the U.S., it’s possible that China’s party could end with all of the abruptness of a Charlie Sheen binge. All I can say is I would not want to be standing next to the fan when the you-know-what hits it.
- China’s economic turmoil a major concern for US companies (chinadailymail.com)
- Zombie borrowers haunt Chinas shadow banks (chinadailymail.com)
- Will China soon become a democracy? (chinadailymail.com)
- China’s deceptively weak (and dangerous) military (chinadailymail.com)
- Beijing says less fireworks for Chinese New Year (chinadailymail.com)
- The China Syndrome (chinhdangvu.blogspot.com)
- Is China’s Economy Inflating a Stock Market Bubble? (dailyreckoning.com.au)
- China’s economic growth at six-year low, making further stimulus more likely (theguardian.com)
- China premier says downward pressure on economy still increasing: state radio (businessinsider.com)
- China’s slowing economy, oil prices and booming house prices (economist.com)