Friday, October 29, 2010

Notes From the Ground in China

Monday October 25, 5:00 pm ET

By Eric Jackson, RealMoney Contributor

I'm in Shanghai and have been traveling in China since Thursday. I will be in the country for the next two weeks on business and will be providing regular updates here at RealMoney and over on TheStreet.

What have I learned so far on the visit?

  1. China is still growing like a weed. The latest GDP numbers last week said the country was still growing at a 9.6% pace. Some observers in the West are concerned that the number wasn't above 10%. On the ground over here, I see massive growth in infrastructure, commercial and residential real estate, and the country appears to be in the early stages of a secular surge in middle-class spending.
  2. Worries about a housing bubble are overblown. Last spring, Jim Chanos and other hedge fund managers claimed that China's property market was in a massive bubble, calling it Dubai times 1000. Since then, the country has introduced measures to cool speculation in Shanghai, Beijing and Shenzhen. Last week, the Chinese central bank raised rates by a quarter point and is expected to raise it five more times in the next months, taking it back to pre-crisis levels. Prices remain firm in Shanghai and have stayed strong in the smaller cities. People are borrowing very little to buy their homes compared to their counterparts in the West. The same is true for the speculators -- many in China still see a home as a desirable and safe asset to own.
  3. The "middle classification" of China will be the country's next Great Leap Forward. China is pursuing a policy of increased internal consumption in order to better insulate itself from financial problems occurring outside the country. This policy is very wise, as most Chinese I've seen in the last few days appear to like spending money and will be happy to abide by the government policy to spend more in the future. Once this starts to happen, the power of China's large population will start to show itself.

As I see them, the big risks remaining for China are:

  1. A trade war spilling over and threatening the global economy: Currency tensions are running high these days, with China in a central position. On the one hand, Beijing wants to protect its own interests and not increase the value of the yuan just because the U.S. and others want it to. On the other hand, it can't be inflexible and risk protectionism and other retaliation that would end up greatly hurting the world economy.
  2. Increase in commodity prices: China is in desperate need for resources (aside from the rare-earth variety) to power its growth. As such, it can't have runaway commodity prices again as we saw in 2008.
  3. Income inequality sparking social unrest: There is great concern among government officials and businesspeople in China about potential future fighting between the haves and the have nots -- or urban vs. rural. This looming discord drives much of Chinese policy today: how to promote harmony over jealousy.

The Chinese government has a big dry mop it can use to soak up a lot on nonperforming loans if need be. While there are risks facing the country, they aren't the ones which get the most attention from Western observers.

From where I sit, the future still looks very bright in China.

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