Maybe I don't need to take Chinese After All . . . .

From Stratfor Editor interviewed in Yale's SOM bulletin.

Q: China is described in the book as a paper tiger. Why do you come to this conclusion?

China is 1.3 billion people. According to Chinese government statistics, 600 million of those people have a total household income of $3 a day or less. Another 440 million earn between $3 and $6 a day. What we would call middle class, people with a household income of $20,000 and above, account for only 60 million people in China. That's still comparable to a large country, like France, but it represents less than 5% of the Chinese population. China is an extraordinarily poor country. Most business people travel to that small part of China that contains the tiny middle class. And they extrapolate from that.

You always have to remember that China can't sell electronics or toys to people earning $2 or $3 a day. They have to sell those goods to the advanced industrial world. And if the advanced industrial world isn't buying, China is in tremendous trouble. When the United States or Europe stops consuming as much as they did before, you’re dealing with unemployment in a country where unemployment can yield malnutrition. What we're seeing right now is China introducing a massive security crackdown to try to control a situation of enormous unhappiness in China.

China is also holding extremely large dollar reserves. Japan in 1990 and the United States in 1929 held massive foreign currency reserves, which was a precursor to serious economic dysfunction, because when you are unable to metabolize that much money, there is something wrong in the virtuous cycle of exports, investments, and so on.

I'll leave you with one final figure. If the United States grows at 2.5% a year, China will have to grow at 8.25% a year simply not to fall behind the United States in absolute numbers. The idea that China will catch up to the United States within 10 years is just an arithmetic impossibility. And so China is a case where businessmen have bought into several propositions that were true 10 or 15 years ago, but are not true now. That shows the constant need to reexamine the premises on which you're building your investments.