Lots of talk about inflation here, due to a weaker dollar, high oil and commodity prices.
There’s an even bigger inflationary force looming on the horizon: China.
The Beijing Olympics will open up the Middle Kingdom to scrutiny like never before. What’s going on in China could cause another stock market-rattling event here in the U.S.
Sources tell me that the Chinese government is doing much more than shutting down factories to stop the choking air pollution in the nation’s capital in a last-ditch bid to get cleaner air for the summer Olympics. And it will have to.
As China's state-controlled economy continues to blend with more freewheeling Western capitalism, China is now home to 16 of the planet’s 20 most polluted cities. Beijing sits in a valley surrounded by mountains and is hit with frequent sandstorms that trap it in smog.
With the media descending upon it, the summer Olympics could turn into a big embarrassment for China.
China has been exporting deflation in the form of cheap goods to the US for years now, keeping inflation here in check.
But given its own inflationary forces, including new labor laws, tougher environmental laws, and given that China is very much about honor and about saving face, coverage of the Olympics in the Middle Kingdom could seriously embarrass officials and cause them to crack down on factories that make cheap goods and to dial back on expanding them.
That spells more inflation here and that would hurt the market.
China is an environmental dystopia. I was in Beijing and Shanghai a year ago speaking at a Forbes Magazine investor conference. Outside of the city, I could not see twenty yards ahead of me, the pea-soup smog was so bad. People walking or biking with surgical masks crowded the streets there. China tried to plant trees up and down its highways, but many of the trees are dead, many covered with white ash. I got physically sick for a week upon my return.
No less than “six provinces and municipalities--Hebei, Inner Mongolia, Shandong, Shanxi, Tianjin and Beijing--have already started shutting down polluting factories and curbing power-plant production,” the Wall Street Journal reported yesterday. That’s an area larger than France, Germany and Italy combined, the paper said.
“As much as 10 per cent of China's farmland is polluted; roughly 700mn of China's people drink water contaminated with waste,” wrote Joseph Quinlan, chief market strategist for Bank of America, wrote in the Financial Times. “In 2007, China surpassed the US to become the world's largest emitter of greenhouse gases.”
China’s pollution could get worse as its middle class grows, given that there are now only about nine cars per 1,000 people in China, versus nearly full car ownership per capita here in the United States. Much of China’s cars run on highly polluting diesel fuel. Water is a problem too, as China’s government is demanding provinces outside the city reroute potable water to Beijing for the Olympics.
China’s inflation rate is already running at around 11%, and inflation could creep higher, as workers may get an 18% wage hike, as proposed recently by the government. Stay tuned.
Important footnote: Watch out, too, when investing in China's companies, and not just because there is a bubble ballooning in its stock market there. China's companies have been booking their profits under a new accounting regime, based on international accounting standards now being used in stock markets around the world. But China has won a lot of loopholes in the rules, as I've previously reported to you.
For instance, China's state-owned companies—about 90% of all listed companies—have been exempted from having to disclose related-party deals, endemic in China. Related-party deals involve shareholder capital wasted on insider cronyism for things like company-paid apartments, land, cars, company loans, or consulting deals given to company executives.
That means investors essentially give money to China's bureaucrats without little disclosure on the deals, basically improving the value of the government’s positions in those companies. "In terms of profits, returns and other indicators, 70% of listed companies on the mainland do not meet international standards," Cheng Siwei, vice-chairman of the National People's Congress, has already warned investors.
China’s police have said they've uncovered 400,000 cases of economic crimes and arrested 370,000 criminal suspects over the past seven years, recovering $12.9 billion, according to state-owned media, which has indicated several executives have been sentenced to death.
Probably makes Bernie Ebbers of WorldCom and Enron’s Jeffrey Skilling rethink that perp walk, which is certainly not as rough by comparison.
