China faces social unrest, hyperinflation

Rapid economic growth doesn't happen in a vacuum, and we're only beginning to see the cost of China's success.

By InvestorPlace Feb 4, 2010 11:44AM

InvestorPlaceChina's red-hot growth in 2009 was great for the global economy, and Chinese stocks helped investors cash in big-time. But now that we've turned the page on 2010, we're learning that annual GDP growth of double-digits doesn't happen on its own.

 

If you want a raw story of the cost of growth, just read a recent Reuters piece about how 30 million "sexually repressed" migrant workers in China's export hub Guangdong are making a mess of things. Local officials are pleading with the government to assist them in an effort to keep rampant STDs under control and help mend the social fabric of the community.

 

There are very serious consequences coming to roost in the People's Republic right now -- from fears of real estate and stock bubbles to growing social unrest to the specter of hyperinflation.

 

It's no secret that the U.S. is largely in its current mess because of a housing bubble. So when you consider that the average home price in China rose 20% last year during a severe global recession, with much more dramatic prices increases evident in major cities like Shanghai, there are lots of reasons to worry about China. Beijing officials are clearly worried, taking a drastic step of halting lending altogether at the end of January to prevent the bubble from getting any bigger. Not a good sign.

 

The stock market in China isn't much better. Eager to cash in on the buzz about Asia, Chinese companies went public at a breakneck pace last year and show no signs of slowing down. For the first three weeks of 2010, we saw $4.5 billion in IPOs with China stocks making up 80% of that total. China XD Electric's $1.5 billion offering alone is more than 20 times the total offerings for the first three months of last year. Couple this with big name Chinese stocks like Baidu.com (BIDU) boasting P/E ratios north of 70, and it's easy to see why investors are worried that Chinese equities are overvalued.

 

Also working against China is growing inflation. The country's latest data showed inflation accelerated to a higher-than-forecast 1.9% in December, prompting the government to unexpectedly tighten monetary policy. As a nation heavily reliant on exports, China normally tries to artificially weaken its currency to make its goods more attractive abroad due to favorable exchange rates. To make a move against exports with conservative central bank policy shows just how afraid of inflation Beijing is.

 

After the average China ADR on domestic exchanges dropped about 9% in January, many investors have started to worry that the profitable ride in this region has come to an end. Bank of America economists have recently gone on the record saying Chinese equities are "near the bottom" after the recent contraction, but I'm not so sure. Rapid economic growth doesn't happen in a vacuum, and we're only beginning to see the cost of China's success.

 

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