by Tyler Durden, ZeroHedge
The consensus view of China is that the country is imploding due to the collapse of the export sector. This view is widely held and considered almost obvious by experts ranging from Jim Chanos to Marc Faber to just about every private equity investor I know. And all of the arguments make sense. But they may also be dead wrong.
I come to the subject of China having read East Asian history at Villanova University in the 1980s under the wonderful lecturer Cornelius Kiley. Later I worked with many Asian firms as a consultant and then as a researcher covering the semiconductor capital equipment space with Fred Ramberg and Ry Ward. This last experience was most revealing because of the intense competition between China, Taiwan, Japan, Korea and the other nations of the region in terms of manufacture of silicon based components and finished electronics.
The China meltdown scenario is based on the idea that China’s economic activity is entirely based upon export sectors and that domestic demand is not sufficient to support the country. But as my friend and colleague at Tangent Jim Rickards noted recently, if the economy slows the Chinese government will just build a few more cities. Or to put it another way, the Chinese could flush most of the banking sector and just start more banks. After decades of socialist construction, what we think of as market mechanisms are still primitive and tightly controlled political constructs.
When my friend Leland Miller started the China Beige Book (“CBB”) earlier this year, I was fascinated by his reporting that said that the non-export sector is actually stronger in China than most western observers believe. CBB reports in the upcoming Q3 2012 analysis:
“China’s economy is not just manufacturing, and there has been a general over-reaction to that sector’s problems. While CBB Q3 results confirm manufacturing weakness, our survey extends to retail, services, property, and other sectors. Most other sectors show more resilience and greater confidence than manufacturing.”
What is more interesting is that CBB reports a decline in the demand for credit in China, this even in the face of a loser monetary posture by the central bank. There may be a finite limit to China’s ability to absorb the disastrous decline in exports, but perhaps the west is over-estimating the importance of such a shock, both in political and economic terms.
continue at ZeroHedge: