Watch out for the Chinese dragon she is about to burst

China, China, China it seems to go on and on but what about the rest of Asia? Research done by the China Briefing found that if you are looking for low labour costs there are actually better places to set up shop in the neighbourhood.

The research was done on 15 countries in the region comparing minimum labour and mandatory welfare costs to business. As the there is no established norm for minimum wage in China the average was calculated using 40 cities across the country.

 Asia_wage_overview

The results are quite surprising as China comes in on third place just after Malaysia and Thailand. It is surprising as the china is a manufacturing country exporting for some 1,58 trillion USD in 2010. (That is 1,580,000,000,000,000,000 USD for those weak on math) and having uncompetitive wages could cause problems for China in the long run, especially if they are unable to control their own growth. The up-side is for the rest of us that Chinese consumers will experience a growth in purchasing power being able to spend more on luxury consumer goods of which some are produced in Europe and the US.

And it is actually the growth issue that I’m concerned about and I see signs that there is a massive bubble building in China which could create problems for the whole world when it bursts.

First, there is massive housing projects going one all over china that are only being build for investment purposes. Whole cities are empty of people even though all the homes have been sold. As we have see in the US and Europe where we had housing bubbles before can investing in a “ever” growing housing market create a house of cards that when they fall take much of the financial institutions with them. One of the questions that they need to be faced is how much of this is real growth due to supply and demand and how much is pure speculation. In Beijing the real-estate price is 22 time the disposable income while it was only 6,4 when the bubble cracked in the US. Furthermore is the lack of transparency in the Chinese financial (because of multiple financial systems working at the same time) making it impossible to know how fare we are from the edge. 

Second, the Chinese have not been able to control growth it seems. Some cities have reported growth as high as 30 %. Especially one thong about this that concerns me is that much of the local economy is being very tight with local business. 

“Many governments are hand in hand with local businesses, especially developers, with both in tandem striving to make large returns,” Chris Devonshire-Ellis, principal of Dezan Shira & Associates, points out. “Much government investment is actually tied up in commercial activities, especially property, and many gains being made are recognizable on paper only. Property prices are being driven up yet many of them still lie empty. Old habits die hard, and while the Central Government has for nearly twenty years focused on GDP growth, an entire mechanism has developed that is only really capable of feeding theoretical growth and lacks any real resale value or flexibility to manage growth in any other way. China is going to have a tough time in taking down a reporting and target structure that is increasingly in part looking to having encouraged the building of castles in the air.”

Third, there is a huge gap between the poor and the extremely wealthy and it is expanding at an explosive rate. At this time there are some 130 billionaires in China compared to the 359 in the US and there are some 825,000 Chinese people who have a net worth of over 1,5 million USD. Compared with the table above they seem to be living in different worlds. When things go from good to worse and finally to “big problems” there will be very strong tensions in the Chinese society that will be released with devastating effects.

A fourth problem is corruption as one commentator, Chen Pokong, put is “Loud words, little action. This is typical of the central government. Not only do they lack the determination, they also have no intention to fight corruption at all. A year ago, a survey showed that 90 percent of the public wanted the government to require officials to publicize their wealth, but 97 percent of the officials were against establishing such a requirement.” Nothing has happened in terms of legislation on corporate and governmental transparency so there is no reason to think that the issue has become even slightly smaller.

With an economy run amok and nothing to stop it, in terms of responsible government at all levels of society the Chinese are in real trouble. There is however no indication that any serious steps are being taken to counter this forth coming disaster.

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2 thoughts on “Watch out for the Chinese dragon she is about to burst

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