Thursday, August 30, 2012

The Great Wall of steroids

One of the main themes of this blog has been to warn investors of China.

So these results by a state-owned "national champion" come as no surprise to readers here:

China Cosco - the world's largest operator of dry bulk ships - sinks to an all-time low in Hong Kong after posting a H1 loss of $767M. The country's 2nd largest ship operator - China Shipping Container Lines - posted equally dismal earnings. Neither company sees any relief in sight for industry overcapacity. 

Overcapacity, inefficiency, massive corruption, and a woefully extractive government have created an environment where things can end very badly very quickly.  

But recall just a few years ago, all the world extrapolated China's GDP figures into infinity, announced the demise of American hegemony, and advised that the entire planet should learn Mandarin so as to communicate with our new masters.

This strain of sycophancy occurs in life in many forms.  Steroids and other performance enhancing drugs provide a short-term boost to strength and speed for athletes, who rationally believe that an edge over their competition can provide riches and glory within their respective sports.  But, when these agents are removed (either by testing or other means) performance invariably suffers and, well, sic transit gloria mundi.

It is similar with China.  Massive industrialization and manufacturing capacity, aided by the performance enhancer of state-directed loans, provided incredible GDP numbers for 20+ years.  The problem was they also laid the seeds of rapid decline as the Schumpteterian forces of creative destruction were not allowed to flourish.  It is as if a mediocre wrestler was provided massive amounts of performance enhancers without learning proper technique.  For a time, he will dominate, but once the enhancers are removed, there is little he can do to compete.

The recent trial of Bo Xilai is amusing in its effort to convince "ordinary" (i.e., non-Communist Party) citizens of China that its elite are not completely out of control.

Again, the decline of these types of export-driven economies can occur very rapidly.  Paul Samuelson's (who holds deity-like status in the economics field and holds a Central Bank of Sweden Nobel Prize) economics textbook reflects the danger of extrapolating these forces very well.  In the 1980 edition, it states Soviet Union  GDP would outstrip America by 2012.

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