5 ms·

China - The Mother Of All Grey Swans

39 points by gamble 16y ago

quant18 16y ago
Many of these arguments strike me as particularly weak, none more so than slide 36, where he claims that China's urbanisation rate is being understated because they have a much higher population density threshold for what qualifies as a "city". He seems unaware that average farm size in China is absolutely tiny compared to America --- I've seen figures as low as 0.04 hectares (400 m2!) for Guangdong [1], which is how the province as a whole manages to achieve an Israeli-level population density of 486 persons/km2. For the whole of China, something like 0.2 hectares seems more reasonable. But even then, if you take the definition he suggests for a "city" (400 persons/km2), every single farming village in China would qualify. That's why China has a much higher population density threshold for defining urban counties. [1] e.g. http://www.agecon.ucdavis.edu/extension/update/articles/v9n1_4.pdf http://www.agecon.ucdavis.edu/extension/update/articles/v9n1... http://econpapers.repec.org/paper/agsaaea05/19565.htm http://econpapers.repec.org/paper/agsaaea05/19565.htm
- ximeng 16y ago
  This is the same guy making the same arguments as he's made on several occasions. See here - the same mall example, same ghost city example, same starbucks example. He's like a stuck record. http://news.ycombinator.com/item?id=1199422 http://news.ycombinator.com/item?id=1199422
  - roel_v 16y ago
    Well here's a respectable (Western) (I don't imply that 'Western' mean 'respectable', just giving details) professor at Tsinghua, who regularly appears on CCTV on economic issues, who's been making the same claims for a while now, albeit in less dramatic terms: http://chovanec.wordpress.com/ http://chovanec.wordpress.com/ ..
- roel_v 16y ago
  Ok, but is your point that the claim that significant urbanization will take place over the next decade and will boost internal consumption and therefore the Chinese economy is true? Because that's what this guy is saying, that we shouldn't expect too much from that. From my observation (with all caveats that apply to this), it seems that in the short run people are moving back out of urban areas, taking up the village life, lowering consumption. Maybe this is temporary, I don't know. I'm quite skeptic of counting on significant further urbanization as a major driver of economic growth, though.
d_r 16y ago
Not a touchy-feely democracy, it can build bridges, highways, skyscrapers a lot faster with less paperwork and fewer property rights considerations. I have been visiting China frequently in the past years. Economic aspects aside, I still find the functional high-speed trains and rise of stunning skyscrapers simply fascinating. Perhaps the engineer in me admires it. Here in Palo Alto, it took the bickering of multiple committees 6 years to decide what to build on a dilapidated, abandoned parking lot. And in the downtown, it has taken nearly 4 years to build a short structure that now also sits empty. And high-speed rail? Forget about it.
- code_duck 16y ago
  We'd be in a very different place regarding railways if GM and Ford hadn't done their absolute best to kill public transportation in the 50s. In the town where I live, the well-used streetcar system was purchased by GM and closed after two years.
  - usaar333 16y ago
    I always figured no active process was needed to kill public transit. Suburbia's core design does the deal. Where I live in Sunnyvale, the light rail system is barely quicker than bicycling. This slowness, along with a well-designed road network and free parking everywhere, makes public transit useless for anyone who owns a car.
    - code_duck 16y ago
      Yes, they influenced the design of the cities to bring about exactly that effect. It was not something that just happened. Once everyone lived at last 5 miles from work and there was no reasonable public transportation, having a car, and consuming a disproportionate amount of fuel, became a necessity.
      - roel_v 16y ago
        It's quite a stretch and bordering tin-foil-hattiness to claim that the oil and car industry socially engineered society over several decades to a point where they could build-in a need for their products. The process is much more complex than that, and not much social engineering is possible on processes at that scale, especially not the sort of clandestine, subversive social engineering you're implying. (I've worked on systems that model land use in function of economics, demographics, transport and environmental factors for almost 10 years now, my wife has a PhD on it, and so do most of the people (in those fields) I work with daily. I in no way claim to understand these processes, nobody does, but claiming to know that public transport was deliberately destroyed by special interest groups is intellectually dishonest.)
jakarta 16y ago
I think the best way to play the China bubble is to go after luxury retailers in the country. For example, I found one company that you can short which basically imports Swiss watches that they then try to resell. Property brokers like E-House might be good shorts too, although they have secular growth since they are taking out mom & pop operators. I used to think that using Australia as a proxy, such as the AUD or some of the commodity miners would work as a means of shorting China but I'm less enthusiastic now. While there may not be demand for some of the luxury developments, there is probably adequate demand for lower level buildings. I imagine that the state owned enterprises would shift their construction projects from luxury developments to critical/needed buildings and infrastructure, potentially keeping commodity demand stable.
deleted 16y ago
[deleted]
fhe 16y ago
(disclaimer: I am Chinese; living in Beijing). Since this presentation made it to the front page of HN, I was curious to take a look. I rarely found similar presentations (by consulting/investment firms) having a clarifying effect on my thinking. They show an impressive array of facts and arguments, but often after reading it I fail to be able to summarize the main ideas in a couple of sentences (the way I often can, say, after reading a paul graham essay). to begin with, why "grey swan"? no doubt, it's a reference to Taleb's book. but what exactly do they mean? that what's happening in China is not completely foreseeable, but more foreseeable than the blackest of black swans? let's simplify things -- if we define growth as growth in wealth, and examine if the chinese are able to pull off creating something like 10% more wealth every year than we did last year. there are two variables to this: how many people are working this year than last, and how productive are they. I don't have time to research on this, but I am guessing workforce size reduction if it happens is going to be more than offset by China simply copying mature technologies from the West and increase the productivity of its people, as it has been doing. the wild card is projects like centrally planned bridge to no where, which looks productive but doesn't actually create things people want, i.e. wealth. But China has always (i.e. last 60 years) been a centrally planned economy, assuming the leadership doesn't all of a sudden get a lot more stupid, and given that the portion of the economy that's centrally planned is shrinking every year, I think one can even make an argument of putting on a few basis points of growth simply from the gov't playing a smaller role in the economy than before. (now of course the big stimulus package might completely skew the balance for these couple of years, but it's temporary noise that probably wouldn't reverse the trend.) and argument of how big a village needs to be before it can be called a town is irrelevant.
- roel_v 16y ago
  I think he means by 'grey' that China's situation is not special, nor that it can escape from economic fundamentals, as shown up in other 'miracle growth' economies in the last century (Japan comes to mind, but also smaller, less-known ones like New Zealand or some of the newer members of the EU like Spain and Ireland whose growth turned out to be asymptotic to the wealth level of the older member states, and didn't exceed them like it looked for a while they would). Economic growth is bound by real value fundamentals, macro-economic policy tricks will catch up someday. That's how I interpreted grey - not uncommon, and quite bland, really.
meric 16y ago
USA grew prosperously for the past 100 years on the back of consumer demand of a mere 200-300 million people. I still fail to see why China cannot do the same with a population of 1200 million. Yes, there will probably be a recession or even a depression here and there, but in only a few decades time China will be much richer. The article is only a short term view, it doesn't address what China will become in 10, 20, 30 years time. There is of course the one child policy that might negatively affect China's economy in the future. China's government is no democracy, and I don't see any reason why it wouldn't simply kill the law when it becomes advantageous to do so. After all, growth at any cost! EDIT: Would like explanation of downvotes.
- Vargas 16y ago
  The main reason for your downvotes is that you are not waving the U.S. flag. Also, you go against the idea that only democracy can deliver prosperity. Both things will earn you downvotes.
- gloob 16y ago
  Compare Canada's population to Indonesia's. Now compare their standards of living. High population does not imply or cause high wealth.
  - meric 16y ago
    Correct, I did not say that high population causes high wealth. What is behind my reasoning is that the lower the standard of living, the more opportunity for economic growth. China's living standard is very low, compared to the US, therefore over the next few decades, because per capita it will still not be as wealthy as the US, it will continue to grow and become much richer than it currently is. A quick google search reveals that this is indeed true for Canada and Indonesia. Indonesia GDP growth, ~2-3% per annum. http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=IDR http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Sy... Canada GDP growth, ~0-2% per annum. http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CAD http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Sy... Moreover, many say (including the author of the article), that because China's growth for the past 30 years has relied on exports and now that developed consumer countries like the US, Canada and Japan can no longer consume as much, China's growth opportunities become further restricted. I do not believe this is the case and here is what I was really trying to say in my previous comment. China has 1200 million people and I believe that over the next few decades China will be able to grow, precisely because its consumer demand will grow, too. After all, US did it with only 200-300 million people, why can China not do it, too? The fact that its government maybe inefficient is only a small effect on the scale of growth we are talking about. From wikipedia, China gdp per capita is ~6600 and US's is ~46000. Even if an inefficient government like China's reduces the potential productivity of the average citizen by three or four or even five times, China still has a lot of room to grow. For more information, look at the Solow-Swan Model. http://en.wikipedia.org/wiki/Exogenous_growth_model http://en.wikipedia.org/wiki/Exogenous_growth_model EDIT: The article talks about previous bubbles like Japan's. Yes, Japan was a bubble, but China isn't; At least not yet. I believe Japan's economic growth stalled because it's GDP per capital caught up with the most industrialised countries. This has not happened in China, yet, and when it does, my prediction will be fulfilled. Converging economies leading to equality, all powered by the capitalist machine that is the global economy.

39 points by gamble 16y ago

Many of these arguments strike me as particularly weak, none more so than slide 36, where he claims that China's urbanisation rate is being understated because they have a much higher population density threshold for what qualifies as a "city". He seems unaware that average farm size in China is absolutely tiny compared to America --- I've seen figures as low as 0.04 hectares (400 m2!) for Guangdong [1], which is how the province as a whole manages to achieve an Israeli-level population density of 486 persons/km2. For the whole of China, something like 0.2 hectares seems more reasonable. But even then, if you take the definition he suggests for a "city" (400 persons/km2), every single farming village in China would qualify. That's why China has a much higher population density threshold for defining urban counties. [1] e.g. http://www.agecon.ucdavis.edu/extension/update/articles/v9n1_4.pdf http://www.agecon.ucdavis.edu/extension/update/articles/v9n1... http://econpapers.repec.org/paper/agsaaea05/19565.htm http://econpapers.repec.org/paper/agsaaea05/19565.htm

ximeng 16y ago
This is the same guy making the same arguments as he's made on several occasions. See here - the same mall example, same ghost city example, same starbucks example. He's like a stuck record. http://news.ycombinator.com/item?id=1199422 http://news.ycombinator.com/item?id=1199422
- roel_v 16y ago
  Well here's a respectable (Western) (I don't imply that 'Western' mean 'respectable', just giving details) professor at Tsinghua, who regularly appears on CCTV on economic issues, who's been making the same claims for a while now, albeit in less dramatic terms: http://chovanec.wordpress.com/ http://chovanec.wordpress.com/ ..
roel_v 16y ago
Ok, but is your point that the claim that significant urbanization will take place over the next decade and will boost internal consumption and therefore the Chinese economy is true? Because that's what this guy is saying, that we shouldn't expect too much from that. From my observation (with all caveats that apply to this), it seems that in the short run people are moving back out of urban areas, taking up the village life, lowering consumption. Maybe this is temporary, I don't know. I'm quite skeptic of counting on significant further urbanization as a major driver of economic growth, though.

d_r 16y ago

Not a touchy-feely democracy, it can build bridges, highways, skyscrapers a lot faster with less paperwork and fewer property rights considerations. I have been visiting China frequently in the past years. Economic aspects aside, I still find the functional high-speed trains and rise of stunning skyscrapers simply fascinating. Perhaps the engineer in me admires it. Here in Palo Alto, it took the bickering of multiple committees 6 years to decide what to build on a dilapidated, abandoned parking lot. And in the downtown, it has taken nearly 4 years to build a short structure that now also sits empty. And high-speed rail? Forget about it.

code_duck 16y ago
We'd be in a very different place regarding railways if GM and Ford hadn't done their absolute best to kill public transportation in the 50s. In the town where I live, the well-used streetcar system was purchased by GM and closed after two years.
- usaar333 16y ago
  I always figured no active process was needed to kill public transit. Suburbia's core design does the deal. Where I live in Sunnyvale, the light rail system is barely quicker than bicycling. This slowness, along with a well-designed road network and free parking everywhere, makes public transit useless for anyone who owns a car.
  - code_duck 16y ago
    Yes, they influenced the design of the cities to bring about exactly that effect. It was not something that just happened. Once everyone lived at last 5 miles from work and there was no reasonable public transportation, having a car, and consuming a disproportionate amount of fuel, became a necessity.
    - roel_v 16y ago
      It's quite a stretch and bordering tin-foil-hattiness to claim that the oil and car industry socially engineered society over several decades to a point where they could build-in a need for their products. The process is much more complex than that, and not much social engineering is possible on processes at that scale, especially not the sort of clandestine, subversive social engineering you're implying. (I've worked on systems that model land use in function of economics, demographics, transport and environmental factors for almost 10 years now, my wife has a PhD on it, and so do most of the people (in those fields) I work with daily. I in no way claim to understand these processes, nobody does, but claiming to know that public transport was deliberately destroyed by special interest groups is intellectually dishonest.)

jakarta 16y ago

I think the best way to play the China bubble is to go after luxury retailers in the country. For example, I found one company that you can short which basically imports Swiss watches that they then try to resell. Property brokers like E-House might be good shorts too, although they have secular growth since they are taking out mom & pop operators. I used to think that using Australia as a proxy, such as the AUD or some of the commodity miners would work as a means of shorting China but I'm less enthusiastic now. While there may not be demand for some of the luxury developments, there is probably adequate demand for lower level buildings. I imagine that the state owned enterprises would shift their construction projects from luxury developments to critical/needed buildings and infrastructure, potentially keeping commodity demand stable.

deleted 16y ago

[deleted]

fhe 16y ago

(disclaimer: I am Chinese; living in Beijing). Since this presentation made it to the front page of HN, I was curious to take a look. I rarely found similar presentations (by consulting/investment firms) having a clarifying effect on my thinking. They show an impressive array of facts and arguments, but often after reading it I fail to be able to summarize the main ideas in a couple of sentences (the way I often can, say, after reading a paul graham essay). to begin with, why "grey swan"? no doubt, it's a reference to Taleb's book. but what exactly do they mean? that what's happening in China is not completely foreseeable, but more foreseeable than the blackest of black swans? let's simplify things -- if we define growth as growth in wealth, and examine if the chinese are able to pull off creating something like 10% more wealth every year than we did last year. there are two variables to this: how many people are working this year than last, and how productive are they. I don't have time to research on this, but I am guessing workforce size reduction if it happens is going to be more than offset by China simply copying mature technologies from the West and increase the productivity of its people, as it has been doing. the wild card is projects like centrally planned bridge to no where, which looks productive but doesn't actually create things people want, i.e. wealth. But China has always (i.e. last 60 years) been a centrally planned economy, assuming the leadership doesn't all of a sudden get a lot more stupid, and given that the portion of the economy that's centrally planned is shrinking every year, I think one can even make an argument of putting on a few basis points of growth simply from the gov't playing a smaller role in the economy than before. (now of course the big stimulus package might completely skew the balance for these couple of years, but it's temporary noise that probably wouldn't reverse the trend.) and argument of how big a village needs to be before it can be called a town is irrelevant.

roel_v 16y ago
I think he means by 'grey' that China's situation is not special, nor that it can escape from economic fundamentals, as shown up in other 'miracle growth' economies in the last century (Japan comes to mind, but also smaller, less-known ones like New Zealand or some of the newer members of the EU like Spain and Ireland whose growth turned out to be asymptotic to the wealth level of the older member states, and didn't exceed them like it looked for a while they would). Economic growth is bound by real value fundamentals, macro-economic policy tricks will catch up someday. That's how I interpreted grey - not uncommon, and quite bland, really.

meric 16y ago

USA grew prosperously for the past 100 years on the back of consumer demand of a mere 200-300 million people. I still fail to see why China cannot do the same with a population of 1200 million. Yes, there will probably be a recession or even a depression here and there, but in only a few decades time China will be much richer. The article is only a short term view, it doesn't address what China will become in 10, 20, 30 years time. There is of course the one child policy that might negatively affect China's economy in the future. China's government is no democracy, and I don't see any reason why it wouldn't simply kill the law when it becomes advantageous to do so. After all, growth at any cost! EDIT: Would like explanation of downvotes.

Vargas 16y ago
The main reason for your downvotes is that you are not waving the U.S. flag. Also, you go against the idea that only democracy can deliver prosperity. Both things will earn you downvotes.
gloob 16y ago
Compare Canada's population to Indonesia's. Now compare their standards of living. High population does not imply or cause high wealth.
- meric 16y ago
  Correct, I did not say that high population causes high wealth. What is behind my reasoning is that the lower the standard of living, the more opportunity for economic growth. China's living standard is very low, compared to the US, therefore over the next few decades, because per capita it will still not be as wealthy as the US, it will continue to grow and become much richer than it currently is. A quick google search reveals that this is indeed true for Canada and Indonesia. Indonesia GDP growth, ~2-3% per annum. http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=IDR http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Sy... Canada GDP growth, ~0-2% per annum. http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CAD http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Sy... Moreover, many say (including the author of the article), that because China's growth for the past 30 years has relied on exports and now that developed consumer countries like the US, Canada and Japan can no longer consume as much, China's growth opportunities become further restricted. I do not believe this is the case and here is what I was really trying to say in my previous comment. China has 1200 million people and I believe that over the next few decades China will be able to grow, precisely because its consumer demand will grow, too. After all, US did it with only 200-300 million people, why can China not do it, too? The fact that its government maybe inefficient is only a small effect on the scale of growth we are talking about. From wikipedia, China gdp per capita is ~6600 and US's is ~46000. Even if an inefficient government like China's reduces the potential productivity of the average citizen by three or four or even five times, China still has a lot of room to grow. For more information, look at the Solow-Swan Model. http://en.wikipedia.org/wiki/Exogenous_growth_model http://en.wikipedia.org/wiki/Exogenous_growth_model EDIT: The article talks about previous bubbles like Japan's. Yes, Japan was a bubble, but China isn't; At least not yet. I believe Japan's economic growth stalled because it's GDP per capital caught up with the most industrialised countries. This has not happened in China, yet, and when it does, my prediction will be fulfilled. Converging economies leading to equality, all powered by the capitalist machine that is the global economy.