I participated yesterday in a discussion of the recently fashionable view that China is on the brink of economic collapse. This theory has already done much to assuage Americans’ concerns about their nation’s faltering economic prowess — but it will take more than talk to wish away the China challenge.
As I pointed out in yesterday’s session, which was broadcast by Huff Post Live, discussions of collapse in China conflate two quite different issues: one is the fate of Chinese asset values and the other that of China’s real economy. I am an agnostic on Chinese asset values but my view on the real economy is the same one I have espoused for two decades: China’s GDP growth should remain super-fast well into the 2020s. To be sure the immediate outcome is clouded by continuing weak demand in China’s main export markets in Europe and the United States but these problems hardly speak to Chinese failings. The fundamental driver of Chinese GDP growth remains in place: catch-up. China can readily continue to boost its output at remarkable rates simply by copying tried-and-tested production techniques and organizational methods learned from the United States, Japan, and Europe. Thanks to a super-high national savings rate, Chinese manufacturers can keep jumping to ever more productive machinery every couple of years. The net effect is that though per-capita output in China is still little more than one-sixth of First World levels, there is plenty of room for further improvement. It doesn’t hurt that hundreds of foreign corporations, lured by visions of a slice of the Chinese market, are falling over themselves to bring their most productive manufacturing technologies to the Middle Kingdom.
What of Chinese asset values? They certainly seem rich. But that observation could have been made a decade ago and indeed two decades ago. At some point there will be a truly painful correction but anyone who shorts Chinese stocks may have a long wait.
This is hardly an argument to buy Chinese stocks, however. Quite simply the problem is Chinese accounting. Although many — perhaps most — Chinese corporations will probably deliver on the stock market’s high expectations, there have been far too many accounting miscues in recent years. It does not help that some of these seem to have been deliberately intended to rip off unwary American investors. Even some of America’s erstwhile “most respected” securities houses have been taken for a ride. It is worth remembering Hong Kong-based Longtop Financial Technologies, for instance. Its 2007 IPO was underwritten by Goldman Sachs and Deutsche Bank. Even after the auditors reported evidence of massive fraud, Morgan Stanley discounted the suggestions and recommended using the stock’s subsequent swoon as a buying opportunity. Similarly American investors have been left holding the bag after revelations of accounting mishaps at such Chinese companies as CleanTech (CLNT), SunTech (STP), and China MediaExpress (CCME).
The conclusion is that though China will continue to thrive, it affords few opportunities for prudent investors.