On the Ground Analysis of China Making Analysts Pessimistic
Ezra Klein, blogger for the Washington Post, recently got back from a China trip. He is pessimistic about the country's economic prospects:
First, it looks like China is firmly in the grips of a real estate bubble. China has a high savings rate and few investment opportunities for individuals, and so people are buying what they know, and that's real estate. What's odder about this is that they're not buying and selling, or even buying and renting. They're buying and holding, in the hope that the property will continue to appreciate.
That's in part because there's no tax on holding a property, as there is in most Western countries. And so the coastal cities are thick with empty office buildings and uninhabited luxury condos. China is now flirting with a property tax in order to tamp down on this sort of thing, but it's hard to say how effective it'll be. Meanwhile, a lot of money that could be productively invested is being pumped into condos that are unlikely to sell at the prices developers are promising.
The country also seems better at encouraging foreign investment from large companies than homegrown investment from small companies. The stories I heard about the difficulties of setting up a small business in Beijing were darkly comic, and bore no resemblance to the hefty tax incentives and red-carpet treatment afforded to multinationals who want to open a large manufacturing plant. And without doubt, the weirdest part of the trip were the many, many empty malls and storefronts we found ourselves in. The only explanation for the survival of some of the businesses was low rents and cheap labor, as turnover didn't seem nearly large enough to sustain the enterprise.
The belief that metal prices will go higher is driven by the belief that the party in China is just getting started. It is Japan in the 60s. Follow Frank Holmes makes this argument again and again. Even the Economist has poohed poohed the downside.
In short, be careful. It seems that the bullish outlook in metal prices is based on a lot of eggs being placed in one basket.