Boom, Baby, Boom - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 18 May 2010
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Beijing, China

Boom, Baby, Boom...

What's going on in China?

That's what we've come here to find out. We paid a visit to China 25 years ago and haven't been back since. More on China in just a minute...

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Let's look at what is going on in the West first.

Yesterday, the Dow rose slightly - after taking a beating last week. Gold settled at $1,228.

Dear Readers are out of stocks. So we're not particularly worried. But we're deeply interested. Has the bear market/Great Correction resumed - as we said it would? Or is this just more 'noise' - with no particular meaning?

We don't know. But we intend to be in cash and gold when we find out.

Back to the Middle Kingdom...

First impression: this is not the same country it was a quarter of a century ago. The last time we were here there were almost no private cars. Everyone dressed in drab grey outfits and rode bicycles. There were no shiny new buildings. There were almost no restaurants. And if you saw a truck, it was likely to be broken down beside the road, with a couple legs sticking out from beneath it.

Second impression: wow! So many daring new buildings...such broad streets...so many construction cranes...so many fancy cars...so many electric bicycles...

...there is no doubt that China is far outpacing Europe and the US in many respects...that the 21st century will be defined by what happens here, not what happens in the West.

Third impression:
China is in trouble.

"Stocks dive on housing fears," says the headline at China Daily.

The Shanghai Composite index suffered its biggest drop of the year yesterday - down 5% after losing 20% since January.

According to the papers, the market has been spooked by government's efforts to restrain real estate speculation. The Chinese have a lot of money. And Chinese investors have relatively few places to put it. They tend to buy real estate...or stocks. This has pushed up property prices by as much as 100% in some areas, over the last 12 months. And it has caused the government to worry about a bubble.

Is the Chinese economy a bubble? Most likely - yes. Will it blow up? Again, most likely, yes. In fact, it seems to be blowing up right now. After leading the world in the bounce phase, it now may be leading the world in a return of the Great Correction.

In a nutshell - China's economy is unbalanced...with far too much weight given to exports. Typical of successful export-oriented Asian economies, it has built too much capacity.

The last big economy to run into this problem was Japan. After the big boom of the '80s, Japan had too many factories...and too much capital invested in the export sector. When the stock market realized it, a big sell-off began. That bear market lasted at least until 2009 - 19 years. For all we know, it's still not over.

Stock markets are always discovering what things are really worth. Right now, they're realizing that China's companies are not worth quite as much as it thought a few weeks ago.

Will the sell-off continue? We don't know. But most likely - yes. Because a big boom is typically followed by a big bust.

But wait a minute. How can we reconcile Impression #2 with Impression #3? How can China be the country of the future and still face a big financial upheaval?

Well, that is the future!

Much the same thing happened in the US after 1929. The US faced a tough period of adjustment - made worse by the efforts of the Hoover and Roosevelt administrations. Instead of letting the problem take care of itself - as they did during the 19th century - the feds intervened heavily. In effect, they were trying to keep the future from happening.

You can slow the future... You can make it more painful. You can drag your feet and shut your eyes...but the future is going to happen, whether you like it or not.

As it came about, the future for the US was bright. It just had to live through the Great Depression and WWII first.

China must be facing its own tests and challenges. Maybe they will be political. Maybe they will be only economic. But they are bound to be monumental...

And the events in Thailand show us how they can be bloody too.

"Thai street battles escalate," says today's Financial Times.

As of this morning, 29 people have died. More than 230 have been hurt. And a quarter of the country is locked down in a 'state of emergency.'

Thailand's troubles look less and less like street protests and more and more like a civil war. Who's right? Who's wrong? Who are the good guys? Who are the bad guys?

Who knows. As in most civil wars, it's probably a shame that both sides can't lose.

But it shows what can happen....

*** Last night, we went to a marvelous restaurant - 1949.

The restaurant is in a complex in the middle of the business district. At relatively little expense, the owners have created a stylish oasis - one that they can knock down in a few years in order to build a high-rise on the precious property.

Dear Readers will recall that Peking duck is on our short list of the world's greatest, almost divine, inventions. Here, at 1949, we had Peking duck in Peking. And it was the best ever.

The Chinese have been the source of many innovations - from pasta to gunpowder. But Peking duck is their finest contribution to human life.

*** "Talents heed the call of home," says China Daily.

For many years, some of the brightest and best of young Chinese left the country. They considered the opportunities for education, entrepreneurship, and career advancement better overseas. Often, they went to the finest universities in Britain, Canada and America. Then, they took top jobs at multi-national companies, research institutes...and in academia.

But now they're coming home, says the paper.

We met a number of these people yesterday. US-educated...sometimes US raised...the overseas Chinese are now finding more opportunities back in China.

Why?

Because there is more money in China. Growth rates are higher. And new businesses find capital more easily.

In short, China is booming. And booms bring prodigal sons back home.

"I studied law in America..."

"I went to university in Montreal, Canada..."

"I used to work for Baker Mckenzie..."

"I grew up in Tennessee..."

It seemed like everyone we met had ties to the US or Canada. But now they're doing business in China, not in North America...

Boom, Baby, Boom...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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