Ezine No2

1. Gareth Horsfall
Mr
+39 333 6492356 (w)
Viale Trastevere, 227
Rome (RM) 00153
Italy
Why China is really
in big trouble!
Over the next 2 issues I would like
to focus on the economic
powerhouse, China. It is the most
hotly discussed story of the moment
and one which seems to defy Did you know?
economic logic. Additionally, it is likely to affect all portfolio investors,
That the Agricultural Bank of
including regular savers, and therefore worthy of some time.
China which floated on the
stock exchange back in July
I will shed some light on the media hype and explain why China may
of this year has 350 million
not be the saviour of the Western world after all. customers, a greater number
than the population of the
So where do we start? Is China's economy better than everyone United States of America.
else's? It also has 23000 branches
which means it even
Well, there is no shadow of a doubt that the people managing the surpasses the number of
branches that the small rural
economy are very smart and they were quick to pull the economy out
Italian banks seem to have
of recession, by basically delivering the stimulus package equivalent
accumulated over the years!
to 12% of Gross Domestic Product. The only problem is that these
short term advantages come with long term, painful consequences.

2. For example, when you have a large Government you have a great
amount of bureaucracy and this leads to corruption. China rates
poorly on Transparency Internationals corruption rating. This, in turn,
leads to excesses and mis-allocation of capital (i.e.,money being
invested in the wrong places!) China has excesses in the Industrial
sector, commercial and residential real estate. We can see evidence
of these right now, but the amount of excess will only come to light
when the economy slows down.
Chinese Proverbs
So, with all this excess, why is China continuing to grow at pre-
"The best time to plant a
crash levels?
tree is 20 years ago. The
second best time is today"
It is true that China is growing at pre-crash levels, but the important
point to note is that it is not a sustainable growth. It is not a growth Anonymous
you will see in a few years from now, and that is the point which we
must come to understand.
So why is it not sustainable?
Very simply, the growth is being induced by government spending, by
a mis-allocation of capital. As an example, the vacancy rate on
commercial real estate in China is fairly high, but they still keep on
building new offices because they think they will always grow. (This
sounds vaguely familiar!) Therefore, as long as they keep building,
that activity will be registered as growth, until they stop. And when
they do stop, they will drown in overcapacity, and they won't be
building new skyscrapers for a very long time Bright sparks!
If you want evidence, then take a look at the following link which is China is the world's largest
about a town that has been built for 1.5 million Chinese residents and energy consumer and the
is completely empty. world's third-largest net
importer of crude oil, after the
United States and Japan.
http://www.time.com/time/photogallery/0,29307,1975397_2094500,0
China is also the second-
0.html
largest energy producer in the
world, after the United States.
As long as they keep on building the economic numbers will register China's electricity
and everyone is happy. Until the bills need to be paid. And these consumption is expected to
projects have a negative return on capital. grow by over 4% a year
through 2030, which will
The problem with China is that they are in a bubble and, as with any require more than $2 trillion in
bubble (as we all know), it is a good thing taken too far. For example, electricity infrastructure
investment to meet the
there was the railroad bubble in the USA in the 1930's. They built too
demand. In 2009, China led
many railways and the resultant crash came. The Internet bubble of
the world in clean energy
1998. It transformed our economy, but again it was taken too far and
investment with $34.6 billion
the crash came in 2000.

3. and has installed renewable
So what about the slowdown in the US and Europe, China's 2 energy capacity of 52.5
biggest markets? gigawatts (GW), second in the
world behind the United
States.
It is causing a slowdown in Chinese manufacturing. A return to
health in these economies is vital to the Chinese economy. There is
also the view that China's internal demand can overcome the
demand from the US and Europe. This may be possible in the long Final Thoughts
run, but in the short term it is unlikely.
Since I launched the e-
zine, I have been asked a
Lets look at that in more detail:
number of times if you can
forward it on to friends,
China's consumers represent one third of a 5 trillion dollar economy. family, colleagues and
The US and Europe represent a 30 trillion dollar economy and the people you know who
consumers constitute about two thirds of these economies. So on could be interested. I am
one hand US and European customers represent 20 trillion dollars in sure some of you have
purchases and the Chinese represent 2 trillion dollars. Therefore, the done so already, but for
those of you wondering if
US and Europe are 10 times the size of Chinese consumers. A small
you can, the answer is: of
change in spending patterns in the US and Europe needs to be
course. If you think
overcompensated by a huge change in spending in China. This will
someone might find it
happen in decades, not years. interesting then please
forward it. Word of mouth
So what is likely to trip the Chinese economy up? is my best form of
advertising, so please feel
Well, like almost all bubbles, it is impossible to say. It could be a free to pass it on.
slow down in the Japanese economy or a double dip in the USA, or
something not apparent to us today. Bubbles burst as and when they
are ready to, the triggers are rarely known in advance. Disclaimer
I will stop here for this week's edition. Next time I will shed a little The views expressed here are
more light on the pending real estate crisis in China, and what could my own. They are not
be some of the consequences of the actions described above. necessarily shared by AES
International. They are
subject to change at any time
Source: Forbes.com
based on market and other
conditions. This is not an
offer or solicitation for the
purchase or sale of any
security and should not be
construed as such.
References to specific
securities are for illustrative or
informational purposes only
and are not intended to be,
and should not be interpreted
as recommendations to
purchase or sell securities.