Wikileaks Cable Reveals Chinese Gov Aware of Bubble, Over Capacity, and Coming Downturn, and more.

Many amazing revelations from the latest Wikileaks cable. Here are some quotes:
1. This cable contains sensitive but unclassified information - not for distribution on the Internet. 
2. Summary: The head of the World Bank's International Finance Corporation (IFC) office in Chengdu, a PRC national with a patriotic bent, acknowledged that China faces possible asset bubbles [...] 
China does have overcapacity in several industries, but the emphasis on mega-projects by local politicians, many of whom are engineers, will make reducing overcapacity more difficult
[...] However China's "terrible" educational system, which promotes copying and pasting over creative and independent thought, is the largest impediment 
3. (SBU) In a December 17 meeting with Consul General, the head of IFC's Chengdu office, Lai Jinchang, discussed the question of whether stimulus policies have created asset bubbles in the Chinese economy. [...] he particularly noted increased prices in iron and steel, petroleum products, electricity, water, edible oil, and produce. However, Lai, perhaps in part out of patriotism and bureaucratic survival instincts, made the ambivalent prognosis that, although "The signs of an asset bubble are there," the economy was not yet experiencing "genuine" asset bubbles. 
5. [...] [Lai] agreed that overcapacity was a problem in a number of industries.
7. [...]  Discussing the Beijing and Shanghai markets, he [Lai] described the housing prices as "a little scary" and in many cases "totally out of reach" for the vast majority of Chinese citizens. Nevertheless, investment in the hotter housing markets - for those who can afford it -- will likely remain secure for a while to come, he predicted. Although purchase prices often far outstrip realistic rental incomes, the capital gains on most housing purchases will continue to make the purchases worthwhile. The apparent excess of new empty apartment buildings in urban areas, along with price increases, was not necessarily irrational, Lai asserted. Rather, he believed these trends to be driven by the long-term process of urbanizing the Chinese population - a process that still has years to go.
You gotta love this whole statement about how prices are scary, out of reach, there's overcapacity, and over-supply, that rental incomes are too low, BUT YET, purchases are worthwhile and the trend will continue.
[...] 9. China will remain a "poor country" for years to come, and can expect to emerge as a "respectable mid-level" country only in another 10-20 years, Lai said.  [...] 
Please, define mid-level. Whatever it means though, the share prices with a PE of 100 do not price in such a long painful path. Quite the opposite.
11. However, Lai identified China's "terrible" educational system as presenting a serious impediment toward achieving a shift to a more knowledge-based economy. The current system promotes copying and pasting over creative and independent thought. Lai said that the system rewards students for thinking "within a framework" in order to get the grade. He described the normal process undertaken by students when writing as essentially collecting sentences from various sources without any original thinking. He compared the writing ability of a typical Chinese Phd as paling in comparison to his "unskilled" staff during his decade of work with the IFC in Africa.
I can confirm this copying mentality, and the lack for creative thinking and thinking outside of the box from what I have seen during my travels in China. This is very much the result of many decades of communism, the great firewall of China preventing any outside information from reaching the inside and also of course their educational system put in place by the government to great lambs who will not leave the heard, and who will not fight against the system.


Tiho said...

The whole world is going to end pej! Hold on to your keyboard, its going to be a shaking ride hahaha!

pej said...

Dude, my friend, the blog's name is Reality Lenses, not "welcome to fantasy world" :-)

The world is not going to end, but, there will be painful readjustment. I expect this to be far more painful than any living person has experienced in the western world. Something worst than the Great Depression — I call this the Greater Depression.

As any big change or readjustments, the steps to that new set up will be for most people to:
- first deny
- then resist/reject
- finally accept/adapt.

Since you're based in Brisbane — one of the most bubbly area of the AU bubble economy — and work in finance, I expect you to among those who will deny and resist the most.

But since you're a very cleaver guy, in the end, you will accept and adapt, and adapt.

See, I am hopeful!

Tiho said...

Haha that's ultra bearish! SUPER BEAR!

I'm actually in mining and not in finance. I couldn't live with myself working for those dumb bankers. I'm not denying any of what you wrote, I just have a different view on how it's all going to play out.

When I found out and learned about it all the first time, I was like you, worried about deflation and collapse. But than I did some historical study and realized the end game is not played out like that.

So now I'm in the Jim Rogers camp, and stick to commodities, mining and farming. I'm in the camp of inflation (not hyper inflation) because they are going to devalue, like they always do!

pej said...

Interesting, because I have done the opposite: I was in the inflation camp, agreeing with Marc Faber and Jim Rogers mainly.

I have been studying history as well, and the Austrian economics school of thought, so I couldn't agree more with these two who are strong advocates of that school of thought and supporter the Mises Institute.

One day, a blogger recommended that I read Robert Prechter's books. This was the turn of event. He is also from the Austrian school of thought, so what he says makes sense in that framework, but he incorporates a lot more in-depth behavioural analysis, which in my opinion completely made sense.

And here I am, I've now moved to the deflationist camp.

But you're definitely right to stick to commodities, because stagflation (although I dont think that's what we'll be facing) is not good for shares at all.

Tiho said...

Being in Prechters camp means you won't profit from the collapse. You need cash because when Dow goes to 500, the world will be in war. There won't be a stock exchange anywhere hahahaha!

Prechter is awesome however. I've been reading him for years. He recently recommended to short stocks in early July and nailed it.

pej said...

1. Things don't move in straight line. Prechter believes that we'll get to the lows in 2016 or so. I don't have any timelines in mind as far as I'm concerned, and my opinion will (or will not) change, with the macro picture and the market action

2. If you've been reading Prechter's stuff for years, I'm surprised you're still believing that Central Banks have any power to reflate and to "save us". Maybe you should consider reading some of his stuff again!