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Mind on Money: It's time to ask 'what if?' about Chinese economy

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I’m a big fan of Marvel movies, and I really like my Disney Plus. One of the new streaming series is called “What If.” The series takes critical moments in Avengers movies and twists them into alternate story lines. It's fun and easy to watch, but the series is animated, so my wife thinks I’m watching cartoons. She has no interest; occasionally my 12-year-old Ethan will join me; mostly I watch alone.

My favorite part about the series is simply the premise. The concept of “What If” has always fascinated me. As an investor this basic question can form the foundation of amazing opportunity; it can also help avoid devastating risk. To question a paradigm requires curiosity and logic, perhaps the two most valuable tools to an investor.

I believe we may now be experiencing the tip of what could be a “what if” iceberg. In this alternative ending the catastrophe lurking just below the surface involves the Chinese economy, and I believe it is time to ask serious questions about the conventional wisdom regarding this topic.

The conventional wisdom I’ve been reading about and listening to at investment conferences for the past two decades is the “future belongs to China.” I’ve heard all the statistics about the expanding middle class, the rapid urbanization and the economic growth rate two to three times of western economies, including the U.S. But to put it plainly, I never bought the hype.

For most of its time after seizing power in 1949 the Chinese Communist Party has governed over an environment of poverty, sadly occasionally involving starvation. In 1992, however, realizing its collectivist authoritarian methods had led China to fall far behind regional rivals to the point where the party’s continued control in China was threatened, the Chinese government began integrating western styled capitalism-like reforms into the Chinese economy.

The experiment with even limited levels of freer markets, entrepreneurism and global trade bore incredible fruits, and prosperity in China advanced more over the two decades following the reforms than over the prior 50 under statism in its purest form (Communism, aka Socialism).

In a true market economy, however, free people are incentivized to serve others voluntarily through entrepreneurism and employment to create the opportunity of building their own prosperity. The Chinese Community party seems to desire the prosperity associated with free people serving others, but has been unable to muster the courage to enable the underlying individual freedom which makes prosperity truly sustainable.

The party has continued to attempt to use state based central planning to control the rapid growth unleashed by the hard work and entrepreneurism of the Chinese people. Like every other endeavor of central economic planning attempted in history or on the globe currently, I’ve always believed the Chinese Communist Party was destined to fail. Socialism and central planning don’t work. Never has, never will.

This week news regarding the Chinese financial system dominated headlines around the world, causing increased volatility in markets here in the U.S. The rug was pulled back on China’s largest housing developer, Evergrande, and low and behold, underneath the rug was nothing but poorly calculated central planning decisionmaking and debt. Lots and lots of debt. Unable to continue developing and selling apartments in empty centrally planned cities, Evergrande will likely fail and default on $300 billion of debt owed to suppliers, contractors and bond holders. (source: CNBC)

Looking under the rug even further, once again calls attention to the reality that the Chinese Communist Party has not allowed consumer demand and free markets to allocate capital and resources in China, but rather it has attempted to use statist controls to allocate resources as it sees fit, and like Evergrande, it has done so on a mountain of debt. A total of $46 trillion in debt, which amounts to a staggering 270% of its annual GDP. (source: Bloomberg)

Voices in the American media are relaying reassurances by the Chinese government that Evergrande will be limited to a “Chinese problem,” but once again I’m not buying the hype. Central economic planning, aka socialism, doesn’t work, and if the Chinese bill is coming due the global consequences could be dramatic. It’s time to start asking “What If,” and preparing accordingly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at Securities offered through LPL Financial, member FINRA/SIPC.


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