When I lived in Japan many years ago I had a friend who used to tell me the most wonderful factoids. If you laid all the noodles eaten by the Japanese in a single month end to end they’d reach from Yokohama to Chicago and back 45 times. Fourteen people a year are killed bowing to each other on Tokyo metro platforms (they knock each other on to the lines). That’s more people than die of leprosy in all of Asia every decade. If you scraped all the snow off the top of Mount Fuji in the winter you’d have enough water to supply Africa for 50 years. There’s enough concrete lining greater Tokyo’s once picturesque rivers to pave an area the size of Wales.
I have no idea how accurate any of these silly statistics were but I feel I am with this friend again every time I talk to anyone about China. Look at it like this, a broker told me a couple of months ago. Last year China imported 10% more raw materials than the year before. India’s total annual imports are just the size of that 10%. He then went on to remind me that China consumes more steel, copper and iron ore than any other country in the world. And its consumption of bourbon whisky is about to over take that of the US. Oh yes, and 80% of the world’s giant cranes are at work in Shanghai.
I don’t know how many of these things are strictly true either (although I’m pretty sure the crane one is not). But the proliferation of slightly hysterical China related factoids does tell us one thing – the majority of the investment world is convinced that China’s economy is in the midst of a miracle expansion. It is changing the world so fast that every even slightly sane investor should have been pouring their cash into its fabulous markets this year so far.
I’m not entirely convinced. There’s a ring of the tech bubble about this. Back in 1999 I was hearing similar things about the internet sector. Its growth had just begun. It was going to transform the way we communicated, the way we learnt and the way we lived. The demand for technology and hence the profits would be huge. Much of this turned out to be true. The internet did change the way we live – just not in 1999. The hype hid an utter lack of substance and the sector finally collapsed.
The same may well happen in China. The speed and scale of its growth appear exceptional. But, just like the internet sector in 1999, it has come from a tiny base. The entire Chinese economy even now only makes up a mere 6% of global GDP (and average wages are a measly $80 a month. This means that there is not yet a real middle class to drive long term domestic demand when consumer demand from the US falls off (which it will). Growth in car sales started to fall in China at the end of last year: everyone who can afford one already has one. Yet there is massive over capacity all over the country. There are currently 36 new airports under construction within 300 miles of Shanghai for example – around 34 too many. Just as in the internet boom there were a good 34 too many internet providers.
On top of this don’t forget that China is only semi capitalist: it suffers from a complete lack of democracy, a corrupt bureaucracy and a truly rubbish banking system, to say nothing of a stockmarket that is very much in its infancy. None of which will help it manage the inevitable economic crises of the near future. China will change the way the world works – just as the internet now has. But not yet. There’s going to be a lot of hype and then a lot of money lost first, however many cranes there are in Shanghai.
MoneyWeek editor-in-chief Merryn Somerset Webb, as first published in the Sunday Times