"I was wondering what Eoin thought of the ideas expressed in this article. Make sure to read the second to last paragraph."

Eoin Treacy's view Thank you for this interesting article. It paints a bleak picture of China's medium to long-term growth potential which I do not believe is particularly justified. During the Cold War, when Mrs. Treacy was growing up in Beijing, the Communist Party referred to the USA as a "paper tiger". They argued that while the USA appeared to be a super power and offer a better standard of living, it was all a lie and the country would collapse at any moment. Following two major recessions and two incredibly expensive wars in the last decade many in the USA might feel they were right. However, the USA still has one of the highest standards of living in the world, is an economic powerhouse, the global leader in technological innovation and has vast potential to reform and reshape itself given the political will to do so. Articles such as that posted above strike me as Western equivalents of the "paper tiger" argument.

The stimulus package initiated during the global financial crisis led to a surge in Chinese property prices. This resulted in a market that was already expensive moving even higher. There have been stories circulating about empty cities and shopping malls for quite some time and prices will eventually have to come down if these are going to be occupied. The government is actively trying to cool the market in response to these worries. Reserve requirements have been hiked repeatedly, interest rates are heading higher, restrictions have been put on how many properties people can own and loan-to-value mortgages restrictions have been tightened considerably. There are also proposals to introduce property taxes and to free up more land for development.

The tone of the government response suggests they are attempting to intervene now in order to avoid an even worse situation later. The most pressing obstacle they face is that regional administrations have a great deal of leeway in how they spend their budgets. The old adage that "The mountains are high and the emperor is far away" is as true today as it was hundreds of years ago. This is why hikes to bank reserve requirements are a more useful tool than direct orders to stop building which are all too easily ignored. China is attempting to engineer a soft landing for the property market. I don't know of another country that has successfully managed such a feat and that is a potential worry. However, there is no evidence of a hard landing evident today and the stock market, rather than topping out following a strong advance, is steady within a developing base formation which is a favourable background.

Chinese statistics are unreliable and should therefore be taken as indicative rather than sacrosanct. If this is the case then economic growth, population, migration and urban versus rural figures all need to be viewed as trends rather than absolute values. Economic growth is unlikely to have been a uniform 8-9% every year for the last decade. Rationally it must sometimes have been faster, other times slower. China claims a population of 1.3 billion and uses this to demonstrate the effectiveness of the one child policy. What if the population is in fact larger? There is a significant floating population and an incentive to hide additional children. If one is critical of statistical data generally, there is no reason to have faith in one data set rather than another. Instead, we are better served by observing incontrovertible facts such as stock market performance, currency appreciation and foreign exchange reserve accumulation.

To a large extent the story of China's rapid industrialization is the story of the last decade. The focus on low cost manufacturing raised living standards and employment. China's status as the workshop of the world attracted inward investment and massive capacity expansion, particularly in steel. However the commitment to low cost manufacturing is changing. There is a drive to replace dirty, inefficient smelters and mills with more modern alternatives. China is rapidly moving up the value chain in manufacturing. High speed trains, passenger aircraft, high technology, pharmaceutical development and other advanced sectors are experiencing rapid growth. China has aggressively acquired resources to ensure the security of supply needed to fuel future economic growth. Its stranglehold on rare earth metals is but one example of this trend.

The economic benefits offered by additional infrastructure development are no longer as large as those that can be gained from improving social security, healthcare and the environment. A change of focus is emerging at central government level. Minimum wages went up 20% last June and 20% more in January. Economic growth targets have been lowered marginally to 7%. More money is to be spent on improving healthcare provision and widening the social safety net. Environmental concerns are receiving more attention today than every before. All of these measures are aimed at promoting the consumer economy, unleashing China's savings rate, narrowing the gap between rich and poor and helping to develop the rural interior.

China has risen to remarkable prominence over the last decade and has a number of internal challenges that need to be met. Which country doesn't? There is a clearly articulated change of focus towards social cohesion and the domestic demand story. It will not happen overnight but consumer focused sectors have been leading the stock market for more than a year.

The Shanghai A-Share Index which is dominated by large cap financials industrials and materials remains in an extended base formation, but has firmed noticeably over the last month. It will need to sustain a move above 3300 to break the medium-term progression of lower rally highs and indicate a return to medium-term demand dominance. The decline from the 2007 peak was a disappointment for many investors but the Index is moving closer to base formation completion.

The Shanghai B-Share Index which is more weighted by mid and smaller caps is less focused on the export / industrialization story and is a clear leader. It hit a new recovery high in October following an 18-month consolidation and is now pressuring the upper side of the most recent range. A sustained move below 280 would be required to begin to question potential for additional upside.

The S&P/Citic300 Healthcare, Information Technology, Consumer Discretionary and Consumer Staples sectors all remain in relatively consistent medium-term uptrends. The Industrials sector broke out of its base in October and has been consolidating above 2500 since. It is now testing the upper side of this 1st step above the base and a sustained move below 2500 would be required to question medium-term upside potential.

There is little doubt that commodity exporting countries such as Canada and Australia are now more dependent on China-led growth than they were a decade ago. However, the China secular bull market remains in place. The stock market is likely to be a lead indicator of any economic trouble and is worth monitoring from that perspective alone.

As a source of cheap manufactured goods, China contributed to a disinflationary period in North American and Europe for the last two decades. However, with inflationary pressures rising across the commodity complex and with Chinese wages rising, China is now more likely to contribute to inflationary pressures.
Thank you for this interesting article. It paints a bleak picture of China's medium to long-term growth potential which I do not believe is particularly justified. During the Cold War, when Mrs. Treacy was growing up in Beijing, the Communist Party referred to the USA as a "paper tiger". They argued that while the USA appeared to be a super power and offer a better standard of living, it was all a lie and the country would collapse at any moment. Following two major recessions and two incredibly expensive wars in the last decade many in the USA might feel they were right. However, the USA still has one of the highest standards of living in the world, is an economic powerhouse, the global leader in technological innovation and has vast potential to reform and reshape itself given the political will to do so. Articles such as that posted above strike me as Western equivalents of the "paper tiger" argument.

The stimulus package initiated during the global financial crisis led to a surge in Chinese property prices. This resulted in a market that was already expensive moving even higher. There have been stories circulating about empty cities and shopping malls for quite some time and prices will eventually have to come down if these are going to be occupied. The government is actively trying to cool the market in response to these worries. Reserve requirements have been hiked repeatedly, interest rates are heading higher, restrictions have been put on how many properties people can own and loan-to-value mortgages restrictions have been tightened considerably. There are also proposals to introduce property taxes and to free up more land for development.

The tone of the government response suggests they are attempting to intervene now in order to avoid an even worse situation later. The most pressing obstacle they face is that regional administrations have a great deal of leeway in how they spend their budgets. The old adage that "The mountains are high and the emperor is far away" is as true today as it was hundreds of years ago. This is why hikes to bank reserve requirements are a more useful tool than direct orders to stop building which are all too easily ignored. China is attempting to engineer a soft landing for the property market. I don't know of another country that has successfully managed such a feat and that is a potential worry. However, there is no evidence of a hard landing evident today and the stock market, rather than topping out following a strong advance, is steady within a developing base formation which is a favourable background.

Chinese statistics are unreliable and should therefore be taken as indicative rather than sacrosanct. If this is the case then economic growth, population, migration and urban versus rural figures all need to be viewed as trends rather than absolute values. Economic growth is unlikely to have been a uniform 8-9% every year for the last decade. Rationally it must sometimes have been faster, other times slower. China claims a population of 1.3 billion and uses this to demonstrate the effectiveness of the one child policy. What if the population is in fact larger? There is a significant floating population and an incentive to hide additional children. If one is critical of statistical data generally, there is no reason to have faith in one data set rather than another. Instead, we are better served by observing incontrovertible facts such as stock market performance, currency appreciation and foreign exchange reserve accumulation.

To a large extent the story of China's rapid industrialization is the story of the last decade. The focus on low cost manufacturing raised living standards and employment. China's status as the workshop of the world attracted inward investment and massive capacity expansion, particularly in steel. However the commitment to low cost manufacturing is changing. There is a drive to replace dirty, inefficient smelters and mills with more modern alternatives. China is rapidly moving up the value chain in manufacturing. High speed trains, passenger aircraft, high technology, pharmaceutical development and other advanced sectors are experiencing rapid growth. China has aggressively acquired resources to ensure the security of supply needed to fuel future economic growth. Its stranglehold on rare earth metals is but one example of this trend.

The economic benefits offered by additional infrastructure development are no longer as large as those that can be gained from improving social security, healthcare and the environment. A change of focus is emerging at central government level. Minimum wages went up 20% last June and 20% more in January. Economic growth targets have been lowered marginally to 7%. More money is to be spent on improving healthcare provision and widening the social safety net. Environmental concerns are receiving more attention today than every before. All of these measures are aimed at promoting the consumer economy, unleashing China's savings rate, narrowing the gap between rich and poor and helping to develop the rural interior.

China has risen to remarkable prominence over the last decade and has a number of internal challenges that need to be met. Which country doesn't? There is a clearly articulated change of focus towards social cohesion and the domestic demand story. It will not happen overnight but consumer focused sectors have been leading the stock market for more than a year.

The Shanghai A-Share Index which is dominated by large cap financials industrials and materials remains in an extended base formation, but has firmed noticeably over the last month. It will need to sustain a move above 3300 to break the medium-term progression of lower rally highs and indicate a return to medium-term demand dominance. The decline from the 2007 peak was a disappointment for many investors but the Index is moving closer to base formation completion.

The Shanghai B-Share Index which is more weighted by mid and smaller caps is less focused on the export / industrialization story and is a clear leader. It hit a new recovery high in October following an 18-month consolidation and is now pressuring the upper side of the most recent range. A sustained move below 280 would be required to begin to question potential for additional upside.

The S&P/Citic300 Healthcare, Information Technology, Consumer Discretionary and Consumer Staples sectors all remain in relatively consistent medium-term uptrends. The Industrials sector broke out of its base in October and has been consolidating above 2500 since. It is now testing the upper side of this 1st step above the base and a sustained move below 2500 would be required to question medium-term upside potential.

There is little doubt that commodity exporting countries such as Canada and Australia are now more dependent on China-led growth than they were a decade ago. However, the China secular bull market remains in place. The stock market is likely to be a lead indicator of any economic trouble and is worth monitoring from that perspective alone.

As a source of cheap manufactured goods, China contributed to a disinflationary period in North American and Europe for the last two decades. However, with inflationary pressures rising across the commodity complex and with Chinese wages rising, China is now more likely to contribute to inflationary pressures.