What next for the great China boom…and what does this mean for capitalism?- Pete Wargent

The world has come a long way since the 16th century, when the feudal system revolved around agricultural labourers in Europe reliant upon nobility for a meagre income.

As trade routes opened up, this gave way to mercantilism and new wealth being created through trade, and then the industrial revolution spawned the earliest versions of capitalism.

The very term capitalism was meant to be a derogatory one used by Marxists, highlighting its exploitation of workers.

Free markets thrived to the great benefit of factory owners and the means of production were privately owned through private companies. In a capitalist system it is the public who own the companies through share ownership, rather than the state. This has led to great wealth being created but also great inequality, which to some extent persists today.

Capitalists can have too much of a good thing though, and as wealth became concentrated in too few hands government intervention began to increase and states such as Germany and Britain pioneered the development of the welfare state, which had a great impact on the economies of the more developed countries.

Before the Great Depression of the 1930s, only around a tenth of output in the US was from government expenditure. In developed countries today, you might expect that figure to be closer to one third.

Capitalist countries with their emphasis on free market competition and push for profits have tended to be wealthier than their communist counterparts, and eventually a number of the communist regimes fell, symbolised by the collapse of the Berlin Wall and the German wiedervereinigung of 1990.

 

 The Chindia boom

The biggest story unfolding right now is the Chindia boom – the phenomenal growth being experienced in China and India. This is of particular relevance to us in Australia, as exporters of vast quantities of resources which help to fuel the great construction boom.

[sam id=35 codes=’true’]Of course, the best case scenario for Aussies is that China’s growth continues on a level of massive but reasonably smooth growth of perhaps somewhere close to 7% per annum. We hope that commodity prices will remain robust – in particular the iron ore spot, at its current level of ~$115/tonne – we’ll keep digging it up and flogging it to the Chinese, and we’ll all live happily ever after.

Nice.

The great worry is that China will develop into a monstrous credit bubble – and there are those who fear this has already happened to a greater extent than is even being reported. To this end, I’d recommend watching Channel Nine’s 60 Minutes on Sunday, which will screen an investigation into China’s ghost cities.

China is apparently building 12 to 24 new cities every year, but some reportedly remain completely empty!

 “…with the apartments snapped up as investments by the nation’s wealthy middle class, then sitting empty as the owners fail to find tenants who can meet the rent.

Financial experts fear the ghost town explosion will lead to a housing bubble burst, following China’s real estate boom which came after the government changed its policy 15 years ago and allowed people to buy their homes.

The middle class saw real estate as a solid investment, more stable than the sharemarket and offering better returns than the banks.”

The reason I find this so fascinating is that it is such an unknown.

Sure we’ve had construction booms before and some of them ended disastrously, such as in parts of Florida in the USA. But nothing on such a vast scale has been witnessed.

While it’s hard to envisage such a growth in credit ending well, the real questions are how long it will last and how badly it will end?…and whether the fallout will impact the ongoing growth in China adversely?

 

What for the future?

As for the future of Chinese politics, it will be very interesting to see the impact of the boom on the political system.

Non-capitalist countries have normally been dictatorships, but capitalism, which promotes freedom and competition, tends to be democratic by its very nature.

Therefore, as China moves towards a free market system, it seems likely to me that China will see a gradual shift towards a more democratic system over the coming decades.

Closer to home, capitalism will likely continue to re-invent itself, but in a slightly different guise.

The global financial crisis was a stark warning as to what can happen when free markets are left alone (laissez faire) to do their own thing, and for this reason we can expect a good deal more regulation and state interference in the future.

Our capitalist system is far from perfect, but most economists agree that it’s the best we’ve got.

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'What next for the great China boom…and what does this mean for capitalism?- Pete Wargent' have 4 comments

  1. Pete Wargent

    October 15, 2013 @ 5:18 am Pete Wargent

    Iron ore still holding up since I wrote this – at around US$130/tonne, and a bit better than that in Aussie dollar terms.

    Reply

  2. October 16, 2013 @ 8:07 am Eric McColough

    Hi Pete
    While democracy and capitalism work, it’s the big money machine that I can’t trust. The banks have been way too shifty for way too long and continue to bleed the population for the good of the share holders. Over the last 100 years the big money machine has built a house of cards that governments are too scared to touch. We love things like public transport, electricity and garbage collection and anyone with a TV can see we’re super lucky to live in “the west”, but the faceless men that operate the big money machine have been making sure they‘re a little bit (compounding anually) luckier. It’s hard to blame them, a pig won’t share its corn cob either but is it too late for governments to take back control and govern?

    Reply

  3. Pete Wargent

    October 16, 2013 @ 9:05 am Pete Wargent

    Hi Eric,

    As the system stands, there’s no way that banks won’t operate in the interests of shareholders – it’s what they are compelled to do.

    Increasingly, though, there’s a feeling that if the banks are seen as “too big to fail” and receive implicit government guarantees then the penalty for the banking sector should be much stricter regulation.

    I tend to agree. If banking is ‘different’ and seen as essential for our economies to thrive, then we can surely tighten up regulation. Basel III is a start, but it seems likely that there will be more to come and specifically in Australia.

    In terms of property, there will probably be greater calls for macroprudential measures in an attempt to keep a lid on excessively speculative lending.

    On balance, this is a good thing for everyone. Boom/bust cycles can benefit speculators who get their timing right, but the flip side is that the knock-on effects from housing busts can cripple economies.

    Reply


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