Wednesday, December 7, 2011

China About to Fail

Italy kicked Sicily, slipped on Greece and broke China.

This is a saying we used as kids. You know, thinking we were clever and funny at the same time.

China has been on a huge growth journey for the past 10 years. Using up the world's resources at a phenomenal rate. However, all this is about to end in tears. China has mistakenly seen paper as wealth and not only that, has misallocated the wealth it has accumulated.

An example of this misallocation of capital is in Ordos, Inner Mongolia. Here we have a new town full of brand new offices, apartments and shopping malls. There's just one problem. There are no people to be seen. Even in China with such a massive population, this is the result of too much cheap credit and some bad ideas.

China has tried to catch up to the western economies and has tried to do this in a matter of a generation. It has used its new found paper wealth to build roads and cities to rival the west. But the problem is, little of this new wealth has gone into real assets and innovation for long term wealth creation. It has been squandered on real estate.

China is touted to become the premier economy in the next 20 years or so. But this simply won't happen. Demographically, China has a predicament. The one child policy has caused distortions in the male/female ratio an the rate of replacement numbers that are needed to ensure the population survives has plummeted. Too many males, as is now the case, historically leads to war. Not a good outcome. Like most things, when the State thinks it knows best, the worst it becomes.

The other issues China has is a sparce population with little cohesion. And they are now getting a bit upset. The State authoriies fret about disgruntled inhabitants and their growing discontent within a failing socialist system. It seems discontent with socialism isn't a particulary Western issue.

When China's real estate bubble bursts, and it’s beginning to pop big-time right now, the West will also suffer. Commodity prices are likely to deflate affecting economies such as New Zealand and particularly Australia. Already the Reserve Bank in Australia is lowering interest rates to cope with a lower economic outlook.

The old saying above may be a little flippant and funny, but it tells of the interconnectedness of the world economy. It use to be when the US economy sneezed we all caught a cold, now it includes when China breaks, we all have to clean up the shards.

Gold in New Zealand dollars: $2213.44 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $42.01 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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