Last month, a Hong Kong apartment set a record. It sold for $56.6 million, which works out to $11,350 per square foot – the highest price ever paid for a pad in China. The buyer may have just needed a roof over his head. More likely, he is bullish on China. We are too, in the sense that we expect the Middle Kingdom to mature in wealth and power in the 21st century. But here’s a better bet: that China will blow up before it grows up.
China is a country of hyperbole. There’s scarcely anything you can say about it that doesn’t end with ‘est.’ In some ways, it is the world’s oldest society. In other ways, it is its newest. It is the world’s richest – with more than $2 trillion in reserves. It is also the world’s poorest, with some 200 million people who get by on less than $5 per day. It faces the world’s biggest problems too.
Even in its calamities, China is second to none. People inside the Great Wall were about as rich as people outside it, man for man, until the 19th century. Then, China missed the industrial revolution. Nearby Japan missed it too, but quickly corrected its mistake. It kept the barbarians at arms length, but still managed to pick their pockets. The Chinese, on the other hand, played it cool. The barbarians had nothing to offer, they believed. They still think so. Said Xue Chen of the Shanghai Institute of International Studies, just last week: “The US has a lot to ask from China. On the other hand, the US has little to offer China.”
In the early 19th century, traders from Britain and America bought porcelain (china), silk and tea. Trouble was, they could find nothing to sell in exchange. The trade balance with China went negative, with China building up substantial monetary reserves (in silver). In 1830, a Chinese merchant, Hao Gua, who enjoyed a near monopoly on trade with the gweilos [foreign devils], was said to be one of the richest men in the world. Then, the English found something the Chinese would buy – opium. The fruit of the poppy was popular in many countries but, as usual, the Chinese over-did it. First, it was a favorite of the leisure classes. Then, it trickled down to ordinary workmen. Soon the coolies were neglecting their labors and China was in crisis. When the authorities tried to stop the drug trade, the English opened fire, humiliating the government and almost bankrupting it. People lost confidence in Manchu rule. By mid-century, nearly half the country was in open revolt. A Christian revolutionary had set up the “Heavenly Kingdom” in Nanjing. He raised armies and challenged the Qing Dynasty to battle. For a time, it looked like he might win.
In the north, meanwhile, infanticide of female babies had become common in Nien territory – a reaction to famine and scarcity. By mid-century, one out of four young men in the region couldn’t find a bride; “bare branches,” they were called. By 1855, these bare branches were ready to break. They armed themselves and organized. They drove out government forces and controlled a large part of the country before they were finally put down. Between natural calamities and war, some experts put the 19-century death toll at an unimaginable 200 million. And then came the 20th century! The Middle Kingdom staggered forward, from error to accident to catastrophe! From the Taiping insurrection to Mao Tsetung. Then, 30 years ago, Deng Tsaoping announced the new line: “To get rich is glorious,” he said. Suddenly, the Chinese began saving every penny. Building factories. Cutting prices. And beating the barbarians at their own game.
Again, they exaggerated. While Americans built too many shopping malls, the Chinese built too many factories. Then, in 2008-2009 came the “greatest collapse in world trade in history,” says Nobel-winning economist Paul Krugman. Americans – their biggest customers – rediscovered thrift. You might think China would realize it had too much capacity and back off. Instead, it rolled more steel. It built more factories and offices…entire cities.
If stimulus spending is a measure of stupidity, the Chinese are three times as dumb as Americans. Both governments respond to correction by doing more wrong than they did before. Loans in China are rising by about 40% of GDP annually. The money supply is soaring at nearly 30% a year. “We estimate that [fixed capital formation] accounted for 70% of China’s growth in 2008 and close to 90% of China’s first half of 2009 growth,” says a report from Pivot Capital.
It is just a matter of time until this capital spending bubble blows up. But China is full of bubbles. In another example of its central planning, it made the ancient practice of infanticide state policy. One couple/one child was the rule. Missing girls was the result. Then, when the boys grew up, they discovered that their brides were missing too. The working age population of China is collapsing. There were 7 workers to every old person in 1990. Now, there are barely 4. By 2035, there will be only 2. What happened to the workers? They are the missing children of the missing girls who then became missing mothers. And by 2040, 397 billion old people – more than the total populations of France, Germany, Italy, Japan and the UK combined – will be missing the support of those missing workers.
Where this leads, we don’t pretend to know. But bare branches bend…and then they break.