Multiple bubbles bursting in China as peasants riot over "one child" policy - 23-May-07 - Generational Dynamics

Government officials are expressing increasing concern over China's stock market bubble, which can't seem to stop growing.

Zhou Xiaochuan, the head of China's central bank, the People's Bank of China (PBoC), has said repeatedly in the last few months that the stock market was in a dangerous bubble.

Last week, the PBoC raised interest rates, a move that should have dampened investors' ardor. Stocks did fall briefly, but then jumped back even higher. There seems to be nothing that the Beijing government can do to let a little bit of air seep out of the bubble.

That really shouldn't surprise anyone, I suppose, since America's stock market is also well into bubble territory, overpriced by a factor of over 250%. No matter how much bigger the bubble grows, the more exuberant investors become.

To show how crazy things are, there's one company, Yardeni Research, that's saying publicly that stocks are cheap. They say that valuations (price/earnings ratios) are low right now -- even though they're far above historical averages -- because you can make more money in the stock market today than in the bond market.

I disposed of this argument several months ago in an essay that I wrote on "A conundrum: How increases in 'risk aversion' lead to higher stock prices." This essay, based on work by Harvard economist named Robert J. Barro was very exciting to me personally, because it connected a lot of dots in integrating macroeconomic theory with generational theory, and explained how the global economy goes from one major crash to the next one, 70-90 years later. Briefly, the people in the generations that survive the previous crash (in this case, the 1929 crash) become extremely risk-averse, and refuse credit. As those generations disappear (retire or die), the younger generations become risk-seeking, and increasingly use debt and credit abusively. The abusive use of credit actually increases the total amount of money in circulation, so that money is poured into BOTH stocks and bonds, so that they both participate in the bubble.

Well, exactly the same thing has been happening in China. At a time like this, there's so much money (liquidity) is available, that people are willing to invest in almost anything.

It's actually very much like the worldwide real estate bubble. People purchase real estate with no intention of living there, but simply to "flip" the property and sell it again when the price go up.

In China ten years ago, you could have purchased an austere burial tomb for about $25. Today you'd have to pay more like $250, and some go for as much as $2500. In recent years, people have been purchasing graveyards, and then selling the tombs at bubble prices. The bubble has also dramatically pushed up funeral prices.

One man bought 24 empty graveyard plots in a cemetery called Spiritual Spring. He spent his family's entire life savings -- around $20,000. But the company never delivered the plots, and all he has to show for his investment is 20 certificates -- worthless pieces of paper.

The story of what's been happening in China reminds me of the last days of the Tulipomania bubble of the 1630s, as described in Edward Chancellor's 1999 book, Devil Take the Hindmost, a history of financial speculation:

"No actual delivery of tulips took place during the height of the boom in late 1636 and early 1637 as the bulbs remained snug in the ground. A market in tulip futures appeared, known as the windhandel (the wind trade): sellers promised to deliver a bulb of a certain type and weight the following spring, buyers took the right to delivery -- in the meantime, cash settlement could be made for any difference in market price. Most transactions were expedited with personal credit notes which also fell due in the spring when the bulbs would be dug up and delivered. Gaergoedt boasts of having made 60,000 guilders from his tulip speculations but admits that he has only received "other people's writing." By the later stages of the mania the fusion of the windhandel with paper credit created a perfect symmetry of insubstantiality: most transactions were for tulip bulbs that could never be delivered because they didn't exist and were paid for with credit notes that could never be honoured because the money wasn't there." (pp. 16-18)

Perhaps it's easier to understand how China could be having a graveyard bubble if you realize that it was just like Europe's own Tulipomania bubble.

As all these examples show, once the market is in the middle of a bubble, investors are totally blinded. They just pour more and more money into the market until the bubble bursts and they lose everything. In every bubble, when you point out to investors that it's bubble, they always say, "This time it's different."

"[A] small group of seasoned investors -- including some with no vested interest in selling stock -- believe the U.S. market is in the midst of another long period of gains," according to the article. "This group of extreme optimists believes that global economic strength will keep shares rising for much longer than has been common in previous eras. Not only China and India, but also Japan, Western Europe, Latin America and other parts of Asia are feeding on one another."

You really have to laugh at some of the reasoning. "This adds up to a special time in market history, says [Louise] Yamada, the former head of technical research at Citigroup's brokerage arm, who now runs Louise Yamada Technical Research Advisors. Comparing the market's behavior with historical patterns -- the number of advancers and decliners, for example, or the duration and magnitude of gains -- she says that in April 2006, the market looked like it was primed to fall heavily. Instead, it bounced back before it fell as much as 10%, which she attributes to the breadth of global economic strength. 'That is why I say it really is different this time,' she says."

This is so ridiculous that it's laughable. Do people really pay money to this "advisor?" She's a moron. I should give all the reasons but it would take several paragraphs. Just read my 2005 article, The 11% Solution, or, for those into macroeconomics theory, my 2006 article, "System Dynamics and Macroeconomics."

So anyway, this "group of seasoned investors" believes that the bubble is just going to keep growing and growing and growing -- even in China!!! -- for another ten years.

Even officials in China don't believe that. As we said, the PBoC is looking very hard at ways to stop the bubble.

"It is clearly unsustainable," he said "There's going to be a dramatic contraction at some point."

Greenspan also said a correction could cause problems for Chinese personal wealth. Some analysts have speculated that the Chinese government could be tempted to dip into its reserves to bail out any stung investors and avoid social unrest.

Greenspan, who stood down as Fed governor last year, said cheap Chinese imports were one of the elements stoking world growth, along with Eastern European workers and the knock-on effects on lower inflation and rates.

"In the last five years, the world as a whole is a growing faster than at any time in the world's history," he said. "It can't last and it won't last because it's a one-shot adjustment."

So how, Dr. Greenspan, will this "dramatic contraction" in China affect the rest of the world?

"Greenspan said asset prices around the world could fall but that the economy may escape unscathed if it were flexible enough to absorb asset price shocks.

"We will get major declines in certain levels but it need not feed back significantly to levels of employment or the real economy," he said."

So the rest of the world is just going to shrug off the collapse of China's economy? That's funny.

China has tens of thousands of regional riots and demonstrations every year, and there was a big one that made international news just this past week. Thousands of peasants in south-west China have attacked family planning officials, overturned cars and set fire to government buildings in a riot sparked by the state's "one-child" policy. The "one-child" policy was adopted in the late 1970s as a means of controlling population; it forbids any woman from having more than one child, on pain of fine or forced abortion.

According to the news stories, local "family planning" officials have been acting like The Sopranos in enforcing the policy, forcing them to pay thousands of dollars in fine, or having their homes destroyed, possessions taken, face smashed, and fingers broken.

What I read into this situation is that China's family planning officials are over their head in debt in some way, and they're using the kind of desperate measures that Tony Soprano might use to generate some income. That's why the peasants were revolting.

From the point of view of Generational Dynamics, China is destabilizing and headed for civil war, as I wrote in January, 2005, replaying the violent civil war that ended in 1949. This conclusion was based on a variety of factors, including the increasing number of mass riots, a huge migrant worker population, big income disparities, and an unraveling of the social structure. Once that happens, world war will not be far off. (23-May-07) Permanent Link
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Generational Dynamics Web Log for 23-May-07
Multiple bubbles bursting in China as peasants riot over "one child" policy

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Generational Dynamics Web Log for 23-May-07 Multiple bubbles bursting in China as peasants riot over "one child" policy

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Generational Dynamics Web Log for 23-May-07
Multiple bubbles bursting in China as peasants riot over "one child" policy