China in for a soft landing

After years of two digit growth figures in China the economy is about to slow a bit down for what IMF believes will be a soft landing. The main drive for this change is the situation in Europe, which does not seem to improve anytime soon. However, the domestic Chinese market seems to be a driver.

Tide is turning for China

China Insurance Building (中国保险大厦), Shanghai

Image by thewamphyri via Flickr

I have touched on the subject of China many times in this blog and have warned about what can be perceived as a growing bubble. The speculation in housing has had many similarities to what we saw in Ireland, Spain and Portugal just on a much much large scale. Driven by large scale growth in the area of 10 % the Chinese economy have been a steam train without breaks or at least nobody was willing to scout for all the dangers that lay on the tracks. But now are the first signs that things are about to change and that we are after all interconnected even if we would like to think it is not the case.

Chinese has the second largest economy the world after the U.S. and in 2011 it expanded by 9.2% a figure that European governments can only dream about, but for China these represent the first figures that points in the direction of a slowdown. The economic growth in 2011 was thus lower than in 2010 and country’s statistical authorities expect a even further slowdown in economic activity.

Economic growth was in the fourth quarter, less intense than in the previous quarter but still a bit higher than economists had predicted. Production from China’s millions of factories rose in 2011 by 13.9 percent compared to 2010 but also the improvement was less than the year before. Retail sales, an important indicator of citizens’ private consumption expanded by 17.1 percent. Again also a bit slower than in 2010.

And despite the general slowdown economists do not expect a catastrophic slowdown as we saw in the US and Europe, But then again so did economists in US and Europe in 2007. As one Li Hiyong from the finance house Shenyin Wanguo in Shangha said “The actual growth in the quarter of 8.9 percent indicates that our economy remains in good condition and stable. The risk of an abrupt slowdown in economic growth is thereby diminished.”

While these figures are quite impressive they are indications that things are changing in the Chinese economy. First of all, China is still heavily relying on exports for their growth and with the slowdown in the economies in general they are vulnerable to changes in consumer behavior. Secondly, a lot of companies are taking production home or closer to their markets reversing the outsourcing flow that we have seen. One of the main reason why is because of the recession and the advantages of mass production in Asia is becoming less attractive. Third, wages in China are rising at an alarming rate some estimates puts the figures at above 20%, which have fueled the housing bubble and will eat up the advantage of producing in china. This should be compared with the 0-2% wage raise that we see in most European countries.

I will not say that the Chinese bubble will burst tomorrow but in my mind there is structural issues in the economy that will lead to a sharp corner and it is closing fast. China has a lot of money in the bank and they just might be able to pull through using their reserves to counter the downturn. However, it is imperative that the country starts to have a more conservative outlook in their economic and development of their social systems if they are not going to end up driving into a very big brick wall.

Chinese tiger is down but far from beaten what will it mean to European business

We have a Chinese economy that might be shaken but far from broken. With an economy that is expanding with nearly 7% in times when most other economies are around 1 or 2% if it is on a expanding curve at all. But while we might fear that the Chinese will come and take over all the business and economies of the western world this is not something that would happen anytime soon simply because it would be bad business. China simply have too much on its own plate for it to be concerned with even more problems, which comes with large accusations.

This interview with Lewis Wan, chief investment officer at Pride Investments Group Ltd. in Hong Kong. Gives some insight into the thinking http://youtu.be/AlkgK8Ky9l8

While the Chinese might be huge in terms of foreign direct investments it is something that they themselves can control and keep within the family so to speak. Doing hostile takeovers of western companies moving control to overseas management will not only be bad for European businesses but also be a poor investment at least for the time being.

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.