Six Degrees of Separation from a Chinese Reality in Cozy Waltham, MA

So today it came to my attention that the renowned Sinologist Scott Sumner has taken issue with my characterization of the Chinese economy.  To rebut my arguments, he uses such technical and economically robust analysis as “this is one of the most comical statements I have read in 3 years of blogging” and “Balding must live in some sort of cocoon”.  For those of you not versed in arcane language of academic economists, he is saying in the words of Dr. Van Nostrand that what I am saying is “kooky talk”.  Granted I have lived in China for three years and Prof. Sumner has lived in Waltham, Massachusetts for 30 years but what do I know.  However, while Prof. Sumner sounds like he had a wonderful two week vacation, a $2 bowl of noodles, and 50 cent ice cream cone, he remains wrong on all the fundamentals.  In the words of Prof. Mandelbaum, its go time.

The first issue I will address is that I inserted the wrong link into the 50% of Beijing apartments are empty.  That is my mistake and I take full responsibility.  However, and I cannot stress this enough, it is the wrong link not that the fact is wrong.  The Beijing government has admitted that about half of apartments have no utility hook ups and “netizens” as they are called in China in internet directed project estimated a 50% vacancy rateSome other reports, put the number at much higher than half.  In Shenzhen, where I live, a Shenzhen University project found the rate to be in excess of 40%.  This is the norm for most every big city and not because of one mistaken badly translated link.  One academic study found that nearly 30% of apartments registered no utility hookupFar from expanding, the population growth of Beijing is easing due to housing prices. Bottom line: the link I used was the wrong link, but the fundamental fact I was trying to make is still true and valid.  Though we we can argue over the exact number 40-50% of Beijing apartments are unoccupied, the problem is enormous.  What is that to you: a healthy housing market?  Strike 1 Prof. Sumner.

What really prompted me to respond to the profound economic insights leveled against me by Prof. Sumner is that I need to get out of my bubble in the “Chaoyang district of Beijing where all the foreigners live.”  Let’s ignore the fact that I don’t live in Beijing (Shenzhen), let’s ignore the fact that I don’t live in an expat area, and that I haven’t spent the last 30 years of my life in Waltham, Massachusetts then yes, I supposed you could say I live in a bubble.  But enough about me and my problems.

To test the rigorous analysis Prof. Sumner provided us with, I went to local grocery stores (notice the lack of foreigners) in my neighborhood while running an errand at the bank (again notice the lack of foreigners) before lunch (notice the theme of no foreigners) and compared prices between common household staples of the Chinese diet and other products with a grocery store in…..(wait for it)…..Waltham, Massachusetts.  If my contention that the price level in China is so much higher than other places, it should be easily testable.  Let’s find out if I am engaging in kooky talk.

Here is a brief description of the methodology.  First, I chose widely used, easily comparable products.  A white onion is easy to compare at the grocery store across countries.  Second, I chose products that are most common to the Chinese diet in which they should have the greatest price advantage Third, most products are unbranded in that they do not carry a recognizable brand which should add no price premium.  The table is below.

USD/RMB Exchange Rate is 6.3502

Product Price Size Normalized Price % Difference
Chinese Milk A 12.90 rmb 1L



Chinese Milk B





US Milk




China Oranic Milk





US Organic Milk




Chinese Egg





US Eggs




Chinese Pork Loin





Organic Chinese Pork Loin





US Pork Loin




Chinese Onion




US Onion





Chinese Thai Rice




US Thai Rice





China Short Grain Rice




US Short Grain Rice






This rudimentary and short comparison of Chinese and American prices is enlightening.  What it tells us very simply is this: if you want to survive on rice and onions, you can do quite well in China.  If you want luxuries like meat, eggs, and milk, then China is very expensive place.  Lest I be accused of dramatizing this situation, there are literally riots in China over the price of pork.  The differences in this simple table would explode even further if we took into account relative incomes, housing prices, or luxuries like a car or coffee.  Car prices in China are frequently 50% higher than the United States.  Let me close this small exercise by noting that if you want to extend this exercise to tradable or branded products, I will be more than happy to oblige.  Strike 2 Prof. Sumner. It only goes downhill for Prof. Sumner from here.

Just to put this in one last bit of perspective.  The average price per square foot to buy an apartment in Beijing: $286.  Beijing per capita GDP: $5,181.  The average price per square foot in Waltham, Massachusetts: $252.  The median income of Waltham, Massachusetts: $65, 238.  Wait that simply can’t be right if China is so much cheaper.  The price per square foot is more in Beijing 13% higher but income is 93% lower!!  I live in China and not in a small New England college town(bubble), but darned if those numbers just don’t seem to add up.  Strike 3 Prof. Sumner.

To address the larger point Prof. Sumner is making, he says “But I suppose that’s also a “bubble” because it involves building, which is that awful “investment.”  I guess the investment-phobes want the Chinese to serve meals and cut hair out in the middle of the street, as they used to a few years ago.”

Once he phrases like that, yes, I am living and teaching in China because I do want the Chinese to return to the romantic times when people used to cut hair in the street.  Despite all evidence to the contrary, Prof. Sumner is saying as an economy, there is no bad investment in China, yes a couple deals might be bad but as an economy it is no problem.  Let’s leave aside what happened in Japan in the early 90’s Bangkok in the late 90’s, and the US in 2008 and turn to what this would imply.  Why don’t we build enormous $300 a square foot apartments in the middle of Africa?  People there need a place to live?  They are urbanizing?  They need investment.  It fits all his magic criteria.  I am not even going to address all the problems with this line of thinking.  Strike 4 Prof. Sumner.

Now if Prof. Sumner wants to make proclamations that the Chinese should enjoy their lot in life subsisting on the cheap rice and onions then let me be the first to invite him to subsist for a month on a diet of rice, onions, broth, and noodles.  That is what is cheap in China.  If Prof. Sumner wants to take me up on this challenge I would even allow the gracious New England Sinologist to use organic, free range broth, noodles, and vegetables from a local Boston Whole Foods.  Maybe a wager on the Chinese economy is in order if Prof. Sumner is so convinced about the goodness of all this investment?

Everyone in Asia knows that China is not a low cost producer.  Everyone in China knows that China is not a cheap place.  I guess there are some realities from New England college towns coupled with two week vacations that just don’t get through.

Maybe we could discuss over a bowl of $2 noodles.  I’d even be willing to buy.

The Real Risk of the Chinese Economy

Though I rarely respond to other bloggers, ever so often I read something that causes me so much heartburn, I am forced to respond.  Marginal Revolution posted a link to the blog Synthenomics criticizing people like myself who are shall we say, rather concerned about the Chinese economy.

Lulu Wang accurately addresses the issue many Chinese face with a lack of investment options and choosing to invest in housing but stumbles writing “The real risk is not that the housing won’t be used, but that the crash would have secondary effects.”  Let’s state this clearly: the real risk is that the housing, industrial capacity, or solar generation won’t be used.  Every other risk is political and comes from that risk.

Let’s examine this a bit further.  In the past 5-8 years, and especially the past 3, China has built an enormous amount of stuff that nobody wants, needs, or uses.  Fueled by a lending boom that began in late 2008 and tripled total lending in 2009, Chinese government at all levels has been spending money like a drunken sailor on leave.  What should scare people however, is just how poorly this money has been spent.  To give you a few examples:

  • The Beijing government admits that 50% of apartments sit empty.  A similar number is found in most major cities in China, not to mention the entire cities that sit empty.
  • After major investment in wind power generation, most wind power capacity was incapable of generating power because… was not hooked up to the grid.
  • Housing price to income ratios that would make a California real estate bubble blush.  The average home price to income ratio peaked around 12 in California.  The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25.  One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435.  That means using the long term global average for the income to housing price ratio, the average Beijinger should be able to buy a 91 square foot apartment.
  • Industrial capacity utilization that is officially at 60%.  (If you believe the official numbers I have a 91 square foot apartment I’d like to sell you)  This is driven by state owned banks and enterprises that over invested in 2009 due to the stimulus fueled lending boom.

To say that “the real risk is not that housing (or any other similar asset) won’t be used is simply non-sense.  This government fueled spending binge comes from the backs of the Chinese.  When Scott Sumner asks “what do you want them to build more of?” and Lulu responds “that Scott can get a haircut for $4 or an ice cream cone for 50 cents shows how low productivity and wages are in China” demonstrates how far removed from reality both are.

Despite protestations to the contrary, the Chinese are purposefully suppressing consumption to pay for their white elephants.  With corporate tax rates of 65% and a total personal rate of about 70%, it should come as no surprise that consumption in China represents such as small fraction of the economy.  Living in China I can attest first hand to the fact that China has easily the highest price level of any country I have visited in the past two years.  An ice cream cone for 50 cents?  Lulu obviously has spent too much time in Michigan and not in China.  Without the willful suppression of the Chinese consumption to pay for political boondoggles in the form of forced public savings, who would pay for trips to Macau?

What Lulu Wang does allude to but misses its importance, is the political economic drivers.  For instance, he writes:  “I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets.”

Let’s make the political economic driver as crystal clear as possible: the Chinese government has made a very clear and conscious decision to create low productivity jobs in order to prevent civil unrest.  Beijing isn’t concerned about the 2/3 of the population that still live as subsistence farmers in rural areas.  Farmers in rural areas can’t riot in Tiananmen Square.  City dwellers in Shanghai and Beijing that don’t see a new mall being built can cause problems.  As long as people are working, even if it is doing things incredibly inefficiently and building bridges that collapse, at least they aren’t rioting in the streets.  The unemployed riot, while those working and enjoying Party beneficence do not.  The Chinese government has no interest in creating high productivity workers that efficiently build businesses because that removes the political control.  The MIT economist Yasheng Huang has estimated that still around 80% of the Chinese economy remains in state hands.  There is no Chinese economic liberalization story.  It is all a party control story.

Now to the scary part.  The Party is scared.  Every 10 years there is a power hand over.  There will be a power hand over later this year.  Every incoming leader is petrified of being the leader under whom China collapses.  There is typically a political crackdown and economic goodies all around.

However, this year has not been a good year for the party.  Economic data that is now just blatantly made up, at least one coup attempt to begin the year, and a collapsing economy do not make ideal conditions to hand over power.

Outsiders do not realize how tense things are in China right now and bad business is.  In my local mall where police used to stroll by, large battalions of police troops are now regular guests.  Small tanks and rows of paddy wagons line the street under the Starbucks every night.

Beijing has backed themselves into a corner and the downside risk is this: announce the apartment owners that their homes are now worth 50% less.  Then see what happens in Tiananmen Square.


My Recent Press Mention

Dr Balding cited Singapore’s Temasek as an example of a non-commodity-based fund. Temasek requires the country to amass current account and fiscal surpluses of 30% of gross domestic product to endow the fund.

“In countries without such clear funding sources, it is unclear that establishment is a wise idea due to the incredibly distortive policies it requires,” he said.

“Sovereign wealth funds can simply become public savings that need to be paid for. In the absence of existing national wealth such as natural resources, countries should seriously review the distortion they introduce.”

Dr Balding said sovereign wealth funds must lay out clear and defined rules for withdrawal of capital or risk becoming “political slush funds”.

The Current Chinese Recession

Everyone the world over, the Chinese included, acknowledge that the Chinese media is blatantly manipulated and censored.  Chinese technocrats quietly admit they don’t trust their own economic data believing it to be rigged for political purposes.  Despite this, most of the outside world continues to believe Chinese economic releases that growth is still moving along, albeit it at a slower pace of about 7.6%.

Given a collapsing demand for Australian commodities, Japanese exports to China falling by 12%, Cathay Pacific cargo shipments out of Hong Kong dropping by 10%, and a manufacturing sector that is at its lowest level since the 2008 financial crisis, how can can anyone take Chinese economic data seriously?  These are not signs of an economy grown anywhere near 7.6%.

When will China admit the economic data is as real as DVD’s you buy on the street and that economic growth is collapsing?

The Singapore Democratic Party is Concerned About Temasek and GIC

As more people study the returns of Temasek and GIC, more and more people are coming to the conclusion that the numbers simply do not add up.

Dr. Chee Soon Juan at the book launch of his new book entitled Democratically Speaking, discusses the problems associated with having the wife of the prime minster run the sovereign wealth fund with such little accountability or transparency.

Though I take no official position on the Singapore Democratic Party or any other political party in Singapore, I would encourage you to think about purchasing a copy of the book.  Proceeds from the book will be used to help Dr. Chee attempt to discharge his bankruptcy debt related to politically motivated defamation charges.

I want to emphasize that I am not taking a position on the SDP or Dr. Chee but that the freedom of speech, freedom to organize, and gather are fundamental human rights.  I support these rights and Dr. Chee’s right to take part in the political process and demand accountability of the leaders of Singapore.

From my Speech in Bangkok…

Entitled Innovations in Sovereign Wealth Fund Management for National Development:

“Abu Dhabi, Dubai, Kuwait, and Singaporean sovereign wealth funds are managed by family members of the heads of state creating clear conflicts of interest driving politically motivated investments.”

South China Morning Post Questions Temasek Returns

Yesterday I received an email from a loyal reader that Jake van der Kamp, the well known columnist from the South China Morning Post wrote a column questioning the returns of Temasek.  Though I can’t find an ungated copy of the column and can’t repost the entire column, he makes a couple of great points about what Temasek is claiming.

“If you were a private investment fund manager with this sort of record, you would have every investor in the world getting down on his knees to you and bowing every time you showed your face in public. You would be venerated as a deity. The world would be at your doorstep asking you to manage its money.”

Investors today are lauded for much smaller returns much less keeping up 17% for 38 years.  I have been unable to find any other investor that claims to have earned a similar return over a similar time frame.  Furthermore, I cannot even find Temasek companies that earn the rates of return claimed by Temasek!!

He goes on to say “And if Temasek’s touted total shareholder return is much, much higher than the overall Singapore market’s, it exceeds that of foreign markets by an even wider margin. If it’s a stretch to get to 17 per cent in Singapore investments since 1974, we are looking at new properties of the elastic band to see it in markets abroad.”  In other words, if Temasek beat the Singaporean market by such a wide amount it must beat foreign markets by a similarly large amount.

However, as he notes “And then you get that byword for loss, Chartered Semiconductor, Singapore’s foray into the wafer fab business. Temasek finally rid itself of this deadweight but its loss in chasing yesterday’s technologies tomorrow was likely in the billions….Also timed injudiciously were investments in Merrill Lynch and Barclays Bank. The timing of the exits from these acquisitions was equally injudicious. I cannot quantify the losses, but informed opinion generally agrees the figure ran into the billions.”

This means that Temasek’s winning investments must have earned significantly more than 17% annually since 1974 to produce the types of returns they are claiming.  These are simply fantasy level returns.

Given that the South China Morning Post has now broken the cone of silence around questioning Temasek and Singapore, I wonder if others in the major press outlets will also begin to question Singaporean numbers?