China’s inflation trap

We’ve seen all kinds of warnings over the years about China’s economy. Several years ago it was all the rage to talk about the “hard landing” China was in for after so many years of growth. Never happened. The banks were going to implode and drag the country down. Never happened. The property bubble was going to pop. Hasn’t happened yet (though I think it’s inevitable). Doom and gloomers also made the general prediction that China’s collage of overwhelming problems — the environment, corruption, local unrest, the class divide — would all contribute to “the coming collapse of China.” It was imminent. I thought so too, back in the earlier days of this blog. Yet China keeps on going, the same existential problems dragging on it like shoes stuck in tar. And yet it keeps going.

Since so many “experts” have been so wrong for so long about China’s economic downfall, it’s risky to point to yet another calamity and say it could bring things crashing down. Maybe the effects of inflation won’t go that far, but I’m not so sure.

Just about nothing is as catastrophic as rampant inflation. A deflationary depression is the only thing worse, but they’re pretty close. As prices inflate, your money can be turned into confetti before your eyes. And it forms a vicious vortex as everyone demands more pay which only fuels higher prices and rents, and one thing feeds on another and the catastrophe spirals out of control.

This is the topic I hear most about from my friends in China. I saw it when I was there about five months ago. The hotel where I often stay in Beijing had gone from charging about 550 RMB per night to 1,000. (I stayed at a Home’s Inn that trip. 225 a night, though you do get what you pay for.) All the food prices had soared, and all my friends were concerned about their apartment rentals gulping up much of their salaries.

Calling a top to China’s property bubble has been as fruitful as those calling for the immediate collapse of China’s banks several years ago. What we do know is that property inflation can’t last forever and there has to be a dramatic drop in prices at some point. Nothing only goes up. Witness the US real estate catastrophe.

For a good overview of the crisis I recommend this post from one of my favorite blogs (and one that practically never mentions China). Although I’ve always loved the outrageous bargain of China’s taxis — you can take a cab from one end of Beijing to another for less than $15 — your heart has to go out to the taxi drivers who are being pushed further and further down the economic ladder.

The blogger seems optimistic that the CCP will take the sane approach and allow the yuan to appreciate. I hope he’s right but am not nearly so sanguine. The party seems convinced that inflation is tolerable compared to a drop in exports and the pain that would come with it. Along with exports, infrastructure stimulus — construction — seems to be the only way for the government to create jobs and keep the economy pumping, and slowing it down could lead to massive unrest.

My own amateur opinion mirrors what I recently read in this superb post that is too complex and detailed for me to quote from, but that should be read by all. The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

In the meantime, my heart goes out to the Chinese people. Inflation is devastating, and I hate to think of how many decent people are going to see much of what they worked for washed away.


Chinese athletes start to speak out

Way back before most of you ever heard of this blog, I put up a post about an interview I had with a Chinese Olympic medal-winner, which you can find here. She talked to me about how difficult it was to train to be an athlete in China:

“Training in China is very different than in the US,” Chen Lu explained. “The skaters move away from their families and live with their team. We had to live in a dormitory year after year and we couldn’t see our parents very much. And there were so many pressures from the coaches, and from the government – it is not easy. It’s totally different from in the United States.”

I think all of us know what kind of pressures Chinese athletes are put under. A lot of my work in 2008 revolved around the Beijing Olympics, and I heard many stories about what a hard life it is. That may be why Chinese athletes in certain categories like diving and gymnastics do so splendidly. But is it humane, and is it fair? It seems now that more and more Chinese athletes are saying it isn’t.

Chinese athletes, once dutiful ambassadors who obediently spent their lives in pursuit of patriotic glory, are no longer willing to just grin and bear it. A series of recent controversies is shedding light on how young athletes are beginning to expose abuse, challenge exploitation and reject official interference in their careers — risky moves in a country where there is no separation of sport and state. Their struggle is a microcosm of the clash in contemporary China between the push for personal liberty and the grip of an authoritarian government….

“What’s happening now is the younger generation of athletes has so many options to communicate, through microblogs and social networking, that they want to stand up and speak out,” said Jiang Yi, the managing editor of Sports Illustrated China.

Yet athletes face a formidable opponent: the state-run sports system — a bureaucracy of training schools, teams and government organizations that selects and coaches more than 250,000 young people for the purpose of winning gold medals.

The system offers many athletes the chance to bring honor to their families and country through competition. But some of these athletes find that the Olympic rings become shackles that bind them for years in indentured servitude to a government that frequently neglects their scholastic education and ignores their injuries while taking a sizable cut of their earnings, all in the name of national pride.

It is a recipe that leaves many athletes unprepared to compete in the real world once they can no longer perform in a stadium. According to the state news media, 240,000 retired athletes suffer from injuries, poverty and unemployment.

Of course, the head of China’s basketball association puts the blame on the spoiled athletes, who don’t understand that a good thrashing is good for them. They only do it because they care.

“Coaches treat their players like their children, and it’s completely normal for parents to hit their kids,” Bai Xilin, the C.B.A.’s chairman of game operations, said in an interview.

Bai acknowledged that the old guard has trouble relating to younger players who have grown up in a more open and prosperous era. But he dismissed the players’ complaints as evidence of a generation gone spoiled. “Kids these days are unable to eat bitterness,” he said. “They want the results but they aren’t willing to endure the hard times.”

I’ve written before about the abuse Chinese athletes are subjected to. It’s a topic dear to my heart. Chinese athletes are in effect indentured servants, and the government owns them. They exist not because they are human beings but because they win medals, and once they stop winning medals they are tossed aside and left to cope for themselves, despite being robbed of their childhoods, despite having cultivated no other skills.

It brings to mind the athletes of the old Soviet Union and East Germany, pumped full of hormones (female athletes often looked like men), and then left to deal with the devastation wreaked on their bodies. I’m delighted to see this scandal getting the exposure it deserves.



A jumble of thoughts on the economy.

At the end of 2006 and several times in 2007, I took a lot of heat for writing that the US economy was on the brink of catastrophe and that gold would be a smart investment. The price of gold when I first recommended it in 2006 was about $685 an ounce. Today it is $1,825 an ounce. It wasn’t long after my prediction that the housing bubble burst, dragging down America’s, and the world’s, economy with it. Gold went down, too, for several months in 2008 and then came soaring back to record highs.

Some commenters said I was crazy, others wanted to make bets that gold would fall, others cited articles in the Economist and interviews with Warren Buffet that proved I was wrong. I’m not going to gloat. At least not much. For once in my life, I was right about something.

Now that gold today hit its all-time high I am cautious about recommending it again. Obviously it’s going to have its ups and downs, and I would only buy on the momentous dips. Gold is manipulated, meaning it makes huge moves up and down as hedge funds and high-speed electronic traders speculate and short it. It is not for the weak; I had to watch my investment crash for nearly an entire year in 2008, but patience saw me through. You have to have nerves of steel. Otherwise don’t invest in gold and don’t even think of investing in silver, the most manipulated commodity on the planet.

I see one area of gold that remains depressed, and for anyone who can stomach huge risk I would recommend keeping an eye on it. These are the mining stocks which, instead of following gold higher have followed the stock market lower. I’ve been watching these stocks since 2006, and this is a pattern: gold soars, miners fall, then the miners make up for lost time by soaring up very quickly, often as high as 8 percent in a single day. They are as risky an investment as you can ever make, with outrageous rewards and crushing collapses. If anyone wants my specific stock picks, email me, but don’t complain if you lose your shirt.

Even more controversial than my advice on gold was my prediction that China would do better during the catastrophe, its economy moving up as America’s went down. When I quoted Niall Ferguson’s calling this “China’s century” I took more heat. I’m not sure I’d go so far as Niall Ferguson, but the fact is that China’s financial crisis was less painful and more short-lived than our own. Their influence has grown while ours has declined. I believe that at this moment more people, rightly or wrongly, see this as China’s century rather than America’s.

All of that may change, of course. China’s problems are legion, and its economy remains as fragile as ever. One match could turn it all into a fireball. And much of China’s continued growth has been based on government spending and massive BS construction projects leaving many cities afflicted with ghost malls and ghost luxury housing. But again, the fact remains, China’s economy went up as ours went down, manipulated though China’s prosperity may have been.

I’m now more pessimistic about the US (and European) economy than ever. Our austerity mindset is destroying everything the US stands for, and that is providing a safety net for the poor and the disenfranchised and the unemployed. I’m not saying handouts. I mean stimulus to boost spending and allow for more jobs, and increasing, not slashing, programs designed to help the underprivileged. We are doing everything wrong, guaranteeing low taxes for those most able to pay, while making everything harder for the poor and middle class, defunding social services while subsidizing the rich and the super-rich and their endless tax loopholes.

I’ve never seen morale so low in the US. Every news program leads with stories on either unemployment, the stock market crashing, or America verging on a new recession. Several of my friends have lost their jobs, and others are in constant fear that they’ll be next. I contrast this with China, which is bursting with optimism, and I know where I would rather be. Now, this optimism and energy may be misplaced and may not last forever, but there it is; it’s real (and yes, I know that doesn’t apply to everyone in China and a lot of people there get screwed worse than in the US). Bottom line: China’s spirits are high, the US’s are at rock bottom.

The depressing thing about being in the US now is that there is literally no end in sight. Inflation is up, housing prices fell again, the markets have crashed, unemployment is to the stratosphere and those who can find a job are being paid less. Most Americans in numerous polls said they want to end loopholes and special tax breaks for the rich and focus on jobs, yet Congress does the exact opposite. Obama, trapped in a cage by deficit hawks, shows little leadership, declining to fight for working people the way FDR did. FDR actually stood up to the banks and vowed not to let them decimate the working classes. He raised hope in a demoralized nation. So on top of the horrific state of the economy, we have no leadership that inspires Americans to have any hope at all. There’s a huge void. And the fact that three inexplicable wars are siphoning off hundreds of billions from the economy only rubs salt in the nation’s collective wound. Everything is grim, and if you think I’m exaggerating, watch the news. Skim through the newspaper.

It’s a grand time to be working in Asia. I wish I could put into words how much I miss it.

Finally, since I haven’t been blogging in a long time, let me offer up a couple of links:

Custer at China Geeks has done an outstanding job fisking the apologist fraudster Eric Li, whose idiotic columns in the NYT and Christian Science Monitor made me apoplectic. This link is ten days old, but it’s a must read.

Mark’s China Blog has an excellent review of Tony Parfitt’s Why China Will Never Rule the World — very different from my own.

Lastly, Imagethief has a great post on the torture of doing banking in China. And I mean torture.

As I said at the beginning, this post is a jumble, and I hope you could make it through to the end.


Math is dead?

I am not quite sure what to make of this, but I can’t see why the commenter would have made it up. If true, it’s the end of an era. Math started commenting here more than five years ago, and since his first posts came over a university’s servers I am guessing he was still relatively young. Love him or hate him, it’s sad news.

For readers interested in the history of Math’s relationship with this blog, go here.