A headline like that might make you think we’re talking about Europe here with everything going on this morning, but no. We’re talking about China. You just have to see this post by Patrick Chovanec (thanks to Ed Harrison) on the spending by state owned Chinese Pharma company Harbin. They’ve literally built a palace using state funds – for a pharmaceutical company! You have to see it to believe it. In my opinion, this signifies a much larger problem that is building.
While I don’t think anyone fully understands the extent of the Chinese case of central planning gone wild, it’s clear that this is just one more crack in the facade. This is the sort of opulence and wild spending that just smacks of excess. China may be on the fast track to growth, but they’re doing so in a highly destabilizing manner. In essence, they’re trying to create wealth with the illusion of productivity and innovation to back it up. China has convinced themselves that the fast track to becoming a developed nation is through government spending. At the same time, they appear to have forgotten that money is not real wealth.
So, while the Chinese growth story remains one to be admired, I have a very hard time imagining that this sort of excess isn’t going to result in wild inflation and an eventual black swan event. The problem is, the Chinese economy is too much of a black box for anyone to understand how much of it is real and how much of it isn’t. To me, the evidence is mounting slowly, but surely….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.