China Doll

Just returned from China and Taiwan. I visited five cities in China; Shanghai, Haimen City, Chengdu, Huangyan City and Ningbo. And, I ended my trip in Taipei. Here are some observations:

1. Growth. The construction boom continues unabated. There are 20+ story buildings going up in every direction. Mostly apartment buildings, but also office towers and mixed use developments. In the center of cities, on the outskirts, everywhere. New roads and bridges are being built helter-skelter. It looks like a race against time to build as much as possible as quickly as possible. Before the sand falls out of the hour-glass.

2. Pollution. Except for a couple of brief moments, we did not see the sky for a week. There is a haze that hangs over the cities. China gets the vast majority of their power from coal power plants. This, plus what is likely lax pollution standards on industry and auto emissions, has created a major pollution problem in China. Taiwan was very clean compared to China.

3. Too Many Factories. The last point is relevant to this one (i.e. why too many factories are being built). Walking through a tradeshow, it is hard to believe that the World needs so many manufacturers of essentially the same product. It just seems like there is too much capacity for the amount of consumption that exists. Part of this illusion is a result of the fact that the World's production capacity is being consolidated inside China from elsewhere around the globe. But, it still seems like there are too many factories making the same thing there.

4. Financial Disaster Looming. There is a game going on between the banks in China and their borrowers. The banks are lending money to businesses and the businesses are not paying back the banks. Yet, the businesses are thriving, producing more and more products and exporting all over the World. The theory I heard in Taiwan goes that the banks, being Government owned, are trying to create jobs in an effort to employ more and more people from the rural areas. And, that this is a form of stimulus (i.e. bank loans that neither lender nor borrower think will get repaid being used to create factories and buildings).

Some economists have estimated that between 40-50% of bank loans in China are non-performing. And, that this represents a huge percentage (up to 30%) of Chinese GDP. But, if you don't recognize the losses, then there is no reckoning. Until something happens that forces you to (such as a slowing in the growth rate).

5. Taiwan Business Owners. I heard multiple stories about Taiwaneses business owners who had joint ventures in China (i.e. moved their production from Taiwan to China, but it is necessary to have a China partner) and who lost their businesses to their Chineses partner. In some cases, the Taiwanese business owners felt they lost their shares in an unfair manner.

All for now.