Wednesday, May 6, 2015

China: a nice place to visit.....

Normally, I like to discuss finance and economics, but I'm going to deviate a bit here and hug a few trees.  Chai Jing's YouTube link below entitled "Under the Dome" received more than 200 million views before it was banned by the Chinese government in March of this year.  It's subtitled, an hour and forty three minutes in length and as riveting and thought provoking as a low budget YouTube production could ever be.  It describes the environmental problems faced by the Chinese people far better than any words I could conjure up, so my commentary will be brief.

https://www.youtube.com/watch?v=T6X2uwlQGQM

My Takeaways:

  • The level of self induced, politically irreversible environmental carnage in China is far worse than Westerners understand it to be.  The future cost associated with the related health care, air and water clean-up, reduced life expectancy and consequent quality of life for the Chinese people will be enormous. 
  • During one segment, audience members began to chuckle when Chai Jing praised the production levels of the country's two largest steel producing cities... describing the US as "coming in third".  The audience seemed to think that the US was somehow inferior by virtue of it's lack of production tonnage when compared to these cities.  I almost felt sorry for them.  The Chinese people don't seem to truly understand how badly their political leadership and consequently, the world economy, is taking advantage of their efforts.  The politburo has managed to convince them that working insufferable hours at an unfair wage, destroying their air quality and fresh water supply, reducing their life expectancy and inflicting generations of health problems on the population, in a misguided effort to manufacture everything from steel, cement, and circuit boards is somehow philosophically "superior" to what's happened in Western economies.
Keeping the above in mind, I had attended an event held by a large US Insurer a couple of weeks ago.  I found myself in a discussion with a very good friend of mine who's a senior executive at the company and also happens to be one of the brightest people I know.  Tangentially, we were discussing insurance product pricing methodology and how it's incredibly easy to "accidentally" increase the top line of an insurance company or product.  Insurance is one of the few businesses where the exact cost (aka claims) of your product is simply not known when you develop, price and "build" the product.   The actual cost is determined years, or perhaps decades in the future when the claims, settlements, legal costs and judgments roll in. You might have a pretty good estimate of your costs today, but until you get your data to critical mass and the law of large numbers takes hold, the gravitational pull to underestimate costs, grow the top line and delay the day of reckoning due to at least some level management's unbridled enthusiasm is a powerful force.

It occurred to us while we were talking, since he's an avid reader of this blog, that China's economy is very similar to a badly priced insurance product.  China is growing it's top line at a breakneck pace, but it's failing to recognize it's above described real, hidden costs associated with the growth.  Any insurer who participates in "long tail" risks (hurricane reinsurance, asbestos abatement, pollution clean up, earthquake coverage, etc..) understands all too well that these costs can increase significantly over time and they make every effort to price and reserve for it.

In contrast, the BBC article below is a microcosmic illustration of China's central planners philosophy re: pricing and cost accounting.  Apparently, Alibaba/Taobao was selling the iWatch for US$60.00 months before Apple's official 4/24/15 release date.  It is, of course, understandable how this can happen.  At the end of the Foxconn or Innolux production line it goes something like.....one for Apple, one for me....one for Apple....two for me....etc.   No wonder China has nearly 600 million smart phone users. Many of the devices are apparently confiscated from US companies and sold to the Chinese people at a steep, subsidized discount.

The odd thing about it is that somehow, even after all of Alibaba's public ranting about how they are doing everything in their power to eradicate "fake" goods on the sites, you can still buy fake iWatches (AW08) on Taobao today (see link below), several months after the fakes were described by the BBC.  I can't believe that this one got by Alibaba's sophisticated super-sleuth efforts to stamp out these illegal activities.  Who would have guessed?  As an aside, I can hardly wait for Alibaba's "fake" earnings report due out Thursday, I always enjoy good fiction...but I digress.

So in summary, the entire Chinese economy seems to be based on cheap labor, woefully underestimated future public costs, confiscated trade secrets, copyright infringement, environmental crimes, misallocation of resources and misrepresented/fake financial statements supported globally by a bloated Yuan (as described in earlier posts). If the Chinese government somehow, someday properly accounted for all of these costs, priced their products accordingly and paid a real living wage, the Chinese people could eventually "breathe easier" but, of course, the prices at WalMart would double.....I guess there's a down side to just about everything. 

Anyway, I'm on my way to India for a couple of weeks so I'll be out of touch for a bit.  I always enjoy this trip.  India is a lot like China.  It's a bustling bee hive of economic activity, except everyone in India speaks English and the bank accounts and financial statements balance.  Go figure.

Namaste'

http://www.bbc.com/news/technology-31832108
http://www.taobao.com/product/aw08-smart-watch.html

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