I had a very interesting meeting this past week that gave me reason to pause. Once again, this isn't what gets reported in the mainstream media in the United States.
I met with a very eminent China expert who now resides in Chicago and works for one of the world’s largest commercial banks. And we engaged in the pros and cons of China as we see it now. It was a great debate in the context of the global fear of a complete collapse of Europe and the euro.
If we all remember, back in September 2008 and leading into 2009, the pessimism was at its peak. There were a few of us who were banking on China pulling the world out of the rut.
And the loudest skeptics denied this possibility, claiming China and its economy's size were too small to pull off this feat. For a few weeks, I was wondering if this would have been possible, too. Yet, my faith did not waiver and soon the Chicken Littles who called for the demise of China were proven wrong.
And yet, this time I sense it is different. And the expert from China (he is actually Chinese) agreed with my view on how we read the circumstances now.
Back in 2008, the United States was completely tapped out, the consumer had no more to spend, the housing market was crashing all around and liquidity had completely dried up. Despite the $700 billion rescue package that was announced, we did not see any real sustained recovery pattern.
What really brought about a ray of optimism was the announcement from China of its own recovery package. Valued at about $500 billion, this was credible and China was able to spend the funds effectively and fast.
This lead to the actual hope that we could see a recovery take shape.
And with China’s appetite to consume raw materials, we started seeing a recovery pattern that the world could participate in. And as time progressed, the world took a collective sigh of relief and confidence started gaining momentum around the world.
That was until Europe started unraveling. Once we were reminded of the debt problems in the United States and Europe, pessimism set in again. And once again, the world looks to China to re-ignite the flames of recovery.
This time, we may not see that happen. I will try and explain this complex situation in simple terms.
The revenue sharing between the center and states in China is a broken model. The center keeps more than its fair share of the revenue without paying its fair share of the expenses.
An example of this is where the center has demanded that the state provide low-price housing to the citizens without any funding sources. The states have borrowed funds from banks and the center has allowed banks to package the state loans into collateralized loans. The center than prints money and buys these debt instruments.
The last time we saw this Ponzi scheme was when U.S. banks sold collateralized loans as AAA products to the world. And we all know how that ended.
So, this bubble in China is about to explode and lead to a real slowdown there. Not a collapse like in the U.S., but a real crimper.
Housing in major cities will get smacked pretty badly. And this will lead China to watch its own spending before trying to rescue the world this time.
The only difference between the U.S. in 2008 and China in 2012 is that China sits on more than $3 trillion in reserves. That will help stop the destruction for now.
But China rescuing the world again? I am not so sure now.
So what does that mean for us international investors? It means caution as we troll the world looking for value investments. Caveat Emptor ("Let the buyer beware").
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