Earlier, I pointed out that the drought in China along the Yangtze River region is now becoming the worst in many years. Some people blamed the Three Gorges Dam, noting some correlation between building large dams and droughts in neighbouring regions, although it is too hard to say with absolute certainty that it is the case.

Whatever causes the drought, some people raised concerns on the China drought situation and its impact on the economy. At the moment, quite frankly, I have very little idea on how serious the problem can be, except that I suspect it is not going to help with the inflation situation, particularly the food prices inflation in near term.

The big China bull Jim Rogers said earlier that the water problem, if not properly solved, will mean the end of the China story. Bill Bishop, who described himself as in the “China can muddle through” camp, agrees that the drought is a game changer.

In his own words, Jim Rogers said:

I don’t mind if China has civil wars, epidemics, panics, depressions, all of that. You can recover from that. The only you cannot recover from is water… China has a horrible water problem in the North… If China doesn’t solve its water problem, there is no China story. I’ve been around the world for a couple of times. I see whole societies, cities, countries, disappeared when the water disappeared.

He added that “they are hundreds of billions of dollar to solve the problem”.

Of course, he is still very optimistic on the whole even to the demographic problems, added that China is modifying the one-child policy, which is somewhat too late in my view, and he believes that overseas Chinese will “come back in the future as China continues to develop”, which shows that he did not know that rich Chinese people want to leave the country.

Of course, I have long pointed out some of the important problems that the Chinese economy is facing, including the real estate bubble, inflation, demographics, reliance on fixed-asset investment as growth driver, and over expansion of money supply and credit. The water problem is probably going to make things more difficult.

The Chinese leaders, in my view, are very intelligent. As always, I trust that they have a very good understanding of the problems, and are trying very hard to tackle the problems. My concern is that too many people are overly confident in the Chinese leadership’s ability to solve all these problems. The fact China bears and sceptics have been wrong for 20+ years gives people huge confidence that China can muddle through. Hugh Hendry said 10 years are enough to create a cult of belief in the capital market. Now, we have 20+ years.

I don’t really care if the water problem by itself is a game changer. It is the complexity and seriousness of all the problems we can see that should make people much more worried than they are now. That is really why I have started to become pessimistic in the recent months on China.

This article originally appeared here: China’s Drought: A Game Changer?

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