Chinese Bubblenomics?

Is China in an economic bubble?

From some reports it looks that way. Three decades of torrid growth fed by inexpensive exports to America and Europe have led managers to plan for continued growth, where construction managers build plants to satisfy the demand from other plants opening. Eventually the music stops and you end up with overcapacity and excess inventory. That seems to be happening now as unsold cars, solar panels, and bedsheets fill showrooms and clog factory floors.

Because of initiatives called for in their latest centralized economic plan, Chinese auto manufacturing is on track to continue to increase until it nearly equals that of the United States. For a country with a population three times that of the US, that might not be a problem; but their economy is still only a third as large as ours. If inventories are piling up, production needs to slow, not expand.

In a normal economy, it would slow, and consumers would reap a bonanza as dealers cut prices to clear out their showrooms. But in this managed economy manufacturers are holding wholesalers to their earlier purchase agreements, and the cars keep churning out, in spite of the lack of infrastructure for commuting, parking, and gassing up. The result is monster traffic jams and serious pollution problems.

The question is whether this is like the America of the ‘50s or the Russia of the ‘80s. Both of those economies had significant government intervention, pollution problems, and issues with managing growth. But the US overcame its issues via gradual decontrol while the Soviet Union stumbled along until the economic contradictions of centralized planning eventually caused it to break up.

In any case, the investment opportunities in China are significant. But so are the risks.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-09T12:53:47+00:00August 24th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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