The Great China Bubblebath

Thursday, October 19, 2006 9:01

For the last three years, the word bubble has been a word that many have used when describing China’s recent assent. Following the Tech Wreck of ’00, Asia Crisis of ’97, and fall of Eastern Europe before it, many thought a broad based macroeconomic “hard landing” was imminent in China and that without serious reform in the banking sector, trimming the trade surplus, and curtailing overinvestment China would fall like a rock from the sky.

The problem is that China is not silicon Valley, it is not Hong Kong, it is not Poland, and it is certainly not Japan. Sometimes it feels like it while listening to venture capitalists talk about “having to be here”, or to freshly minted M.B.A.s from the world’s leading institutions showing up in mass, but this economy is not built on high technology, on propped up real estate, nor from a power vacuum.

It has been built in the span of 3000 years of dynastic change that over the last 20 years has come together into what we call modern China. It started with Deng Xiao Ping proclaiming “It doesn’t matter what color the cat is as long as it catches the mouse” and opening the doors of investment into Shenzhen, and it continues to this day as multinational companies large and small look to China as a place to manufacture, sell, and invest in.

Yet even with planes and hotels packed with foreign executives trying to make sure they do not miss it, many companies and foreigners have a difficult time grasping just how it is all possible.

American executives and reporters are typically the first to scream “BUBBLE!” as the scars for them of Silicon Valley are still very fresh. However, with no one from this generation having seen this level of development from a country so big, it is often easier to dismiss it as a bubble then see it for what it really is, the birth of an economic powerhouse.

In many ways what I have seen in my five years is no less than what I imagine my great great grand parents saw in their time following their American arrival in 1810 mixed with what my parents have seen since World War II. The difference is that the metamorphosis that took American 150+ years to complete is taking place as a rate exponentially faster than that of the United States.

In 1850, American only a few cities like New York, Boston, and Philadelphia that were considered to be the first tier cities of the United States with others like Atlanta, St. Louis and Pittsburgh considered second tier, much like China today. The wealth of the United States historically was concentrated in 13 states on the East Coast, much like China is now. A hundred years later, the wealth spread as America changed drastically as the baby boomers moved from the farm to the city, and by 2020 China expects to move 400 million people off the farm to the city.

Unlike the United States though, China has a number of successful models that it can study in this process and use to overcome obstacles at a much faster place. Rather than build infrastructure 1.0, maintain and upgrade it, and then completely change the system to infrastructure 3.0, China is able to put infrastructure 3.0 in to start with. Many are amazed by the pace at which change can happen here, and how the same changes in their home countries would take 3-4x as long. Shanghai alone has constructed 4000 high rise buildings in the last 10 years… that is four times the amount found in Manhattan.

With all this growth, and all this change, there comes risk. A basic finance lesson will teach students that the level of return should be in par with the level of risk. so, the higher the risk, the higher the return that should be expected. China is no different.

There are a million things that could go wrong, and in many ways that is half of the excitement here. The risk of over building, the risk of people getting left behind, the risk of mismanagement, etc, and in China these risks are magnified by the pace by which things move here. However, these are not bubbles…. these are not things that pop and drain an economy.

To call China a bubble economy is to not understand China or the dynamics behind “China”. As we have shown on a number of occasions, China is highly fragmented and regionalized, and is not one “market” but a series of markets that are within the borders of one country.

So, with this in mind, we will spend the next few weeks discussing the great China bubble bath to give you the reader more insight into just what makes this place tick, and what “bubbles” exist on a regional, provincial, and national level that when viewed together are the great China bubble bath.

Both comments and pings are currently closed.

2 Responses to “The Great China Bubblebath”

  1. ccorkery says:

    October 19th, 2006 at 5:50 pm

    Very interesting article on bubbles. I do indeed loom forward to the series of bubble bath discussions. However, I must admit that I don\’t entirely agree. For the record, I am a firm believer that China is no bubble economy in the sense that the NASDAQ may have been in 2000 or the housing market in Tokyo was at its peak. China is a real economy and we dismiss the Chinese economy with illusions to a bubble economy to our own detriment.

    Equally as dangerous may be the dismissal of some of the very issues you have raised. The thought that perhaps some people are being left behind seems to me to be far more significant than you have asserted. When the U.S. was developing they had the great advantage of The West. People who were left behind in NY or even Atlanta could always strike out West in search of fame and fortune. It was this safety value which somewhat allowed those who had succeeded to enjoy their success. It relieved tension and offered hope to the lowliest of people. China however, is not developing over a hundred years and there is no viable \”Go West Young Man\” to help release the tension uneven development brings. It is far more dramatic and far more combustible. Thus, while I would not call it a bubble per se, the uneven development of China\’s economy (Coastal-Inland, City-Countryside, etc.), with the resentment, public disorder and lack of commitment to the cause this unevenness brings, seems to be something which has the potential to pop and drain the economy. Perhaps the current dynastic cycle will be more brief than the last few and will be ushered out the door by a modern day White Lotus rebellion?

    All in all very interesting.
    I look for ward to the series.

  2. rbrubaker says:

    October 20th, 2006 at 4:31 am

    Hi Chris,

    thank you for your comments. Actually, I am not dismissive of the gap between rich and poor at all, and it is one of the biggest bubbles that I see.

    the above is to simply frame a discussion (or argument) that will ultimately lead to where I identify about 20-30 \\\”bubbles\\\” that exist on different levels. In my mind there are bubbles existing on international, national, regional, and local terms that will have different impacts should one or more pop.

    The difference between rich and poor is one of the national bubbles that I will talk about in a future post.

    However, my argument stands that this is not a bubble, and that the fundamentals are here. It is highly combustible (as seen in reports covering riots) no doubt, and as I write my future posts I will try to show how that comustability depends on the \\\”bubble\\\”.

    As for a dynastic change…. that is another whole series in itself.

    Have a good weekend