Marc Faber believes China is not a bubble
Since your comments about the tech boom are famous for their prescience, my question is: do you see any similarities between the tech bubble and China?
Marc Faber: Every rapidly growing economy is characterized by booms and busts and China is no exception with some sectors of its economy going at present through a boom cycle. The real estate boom has been deflated, but the stock market still needs a significant adjustment on the downside -at least another 50% or more. I am less concerned about China's real economy than about its financial sector, which suffers from a number of imbalances.
You often use historical paralells in your analyses. Is the China phenomenon unique, or can we categorize it under the same broad heading as Japan and the tiger economies?
I think the closest comparison of China's entry into the global economy is the American economy of the late 19th century, which led to a deflationary shock for the old established economies of Western Europe. American exports of agricultural products led to declining commodity prices and a crisis for European agriculture. Today, China can produce just about everything 30% to 50% cheaper than the next cheapest producer in the world and that has a huge impact on the profitability of manufacturing companies around the world. In fact, I believe that China could become the "workshop" of the world - in the same way that Lancashire, England had more machines installed in 1830 than the rest of the world combined. Sure, crises will occur in China, but the long-term looks promising for economic and social development.
Under what circumstances should foreigners invest in China? If they do invest, how should they invest?
I have said that the outlook for the economy looks promising. I am less convinced that foreigners will make a lot of money in China. In particular, it's difficult to find solid companies on its stock exchanges. Personally, I find the real estate market to be the safest bet. Moreover, when compared to the US, I find China to be in less of a bubble. At least there is some substance in China whereas Enron is typical of the US economy - a lot of hot air, little transparency and lots of corruption. Sure, we have corruption in China and Asia, but at least we know who takes the money and how much.In this sense we have far more transparency in Asia.
China stocks keep going up and crashing - such as China Unicom and China Mobile. Have investors been too greedy and shortsighted?
We had a collosssal high tech and communication bubble on a worldwide scale. Chinese telecom stocks have outperformed telecom stocks in the US. Also, the bubble was fueled by irresponsible monetary policies in the US, not in China. Investors are by and large brain damaged - they buy high and sell low - and this is not only endemic to China investors but is common all around the world. Usually in a boom, the demand is over-estimated while the supply is always underestimated.
Some analysts have said that China's sky-high GDP growth is 'non-productive' - ie it's not generating high returns, it's mainly government driven, it's inefficient and there are still few listed companies whose ROE reflects the country's GDP growth rates. How impressive do you think China's growth really is?
I believe that it's very difficult to measure economic growth anywhere. However, what can be measured is the improvement in the standard of living of people. There is in my mind no doubt that the average Chinese is better off today that 10 or twenty years ago. In addition, there's no doubt that China has built a superb infrastructure in a brief period of time. Some of it may generate low returns, but it helps generate higher returns elsewhere and makes China a very efficient producer of manufactured goods.
According to some studies, during the period in which Japan took off, Japanese companies were generating far more profit than China. Is this a concern?
I am sure that this comparison is correct. But, while China is not generating much in terms of corporate profits, it has generated much in terms of economic development and improvement in the standard of living of its people. Also, it's difficult to compare Japan with China, because of these countries vastly different economic and social differences.
Nick Lardy of the Brookings Institute has been saying for a while that the country is going to come face to face with a huge funding crisis at some point, due to its weak tax collection and NPL problem. Is he being alarmist?
No, I think this is a problem, but I see some possible solutions to this problem, ie a more effective taxation system. The NPL problem is real, but what about NPLs in other countries... including Japan. We have economic imbalances everywhere and China is no exception, but at least I can see in China a light at the end of the tunnel, should we get into a tunnel.
Will WTO lock China into reforms or will foreign competition rip up domestic industry causing social chaos?
No, foreign competition is way over-estimated. In the long run, it is Chinese companies which will kill the foreign competition. In the future, you will have a number of important Chinese brands such as we have today many Japanese and Korean brands which did not exist 30 years ago.
What will be the impact of such a behemoth on the rest of Asia?
China has and will remain a mighty competitor for the manufacturing sector of Asia. I doubt that manufacturing companies in the Philippines, Malaysia and Thailand will be able to compete unless they become much more efficient - which is always a possibility. So, I am very bearish about the macroeconomics of Asia's exporting sector in the wake of the rise of China. However, China will also be a customer for commodities, tourism, food products, etc. So some sectors in Asia will suffer, while others will benefit.
What about the impact on Korea and Japan? Are these countries in a position to keep ahead of the curve in value added products?
I think that Japan, Taiwan and South Korea will be net losers from China's opening - of course also Hong Kong, which is about as badly run as Japan, except with more arrogance. That does not mean that you should not invest in these countries' stocks. Each time a company shifts its production from - say Taiwan into China, it's negative for the macroeconomy of Taiwan, but positive for the profitability of the company because of lower costs.
What about Hong Kong? Is it in any position over the long-term to cope with the rise of China, or will we see a slow but remorseless drop in the city's importance?
The rise of Hong Kong after the communist takeover in 1949 is a historical accident. The opening of China, as I envision it, will throw Hong Kong where it belongs - in a very small corner of this world. Hong Kong policy and decision makers - especially Mr Chris Patten and Donald Tsang, who fueled one of history's greatest property market bubbles - have totally messed up the Hong Kong economy because of their lack of economic historical knowledge, and understanding that centres of prosperity can change as a result of changes in economic geography. Moreover, the Hong Kong pubic is continuously misled by its present government, which is backed by the property developing mafia into believing that the opening of China and its entry into the WTO is beneficial, when in fact it is the opposite. Hong Kong will in twenty years time be like Goa in India - once a prosperous autonomous city which has fallen by the wayside.