Tuesday, September 14, 2010

China Investment Guide-I: The Rise And Coming Fall Of The Red Dragon

image There is no denying the fact the China has risen metaphorically like no other nation has in the recent past. The Chinese growth model has not only attained enormous success for the citizens and investors worldwide but has also been an envious state for many other developing countries that have literally failed to do anything with their moribund economies where as the Asian giant successfully managed to bring about a change in common mans life. China’s GDP has multiplied while exports have risen exponentially, so much so that the country has been labeled the factory of the world. But Change is the only thing that is constant in this world and same is true for the Chinese growth cycle. Whatever comes up goes down just as night gives way to day and the life gives way to death. The problem is that just about everyone wants to go to heaven but no one quite wants to die, just as everyone is talking about the China growth story but not many are actually able to understand the haze of uncertainty surrounding the Chinese economy and its growth story.
  • Even though China has attained enormous highs, yet the growth of 200 to 300% of past 2 decades has reached at a critical point where the growth has attained a peak and the only way forward is an eminent decline.
  • China's harsh reality is that after decades of double digit GDP growth, average household incomes still trail miles behind many emerging economies.
  • Not only is China marching towards the greatest bubble in history of mankind, the massive misallocation of wealth is also accelerating at an alarming speed. One doesn’t need to be an economic genius to understand the fact that the wealth gap epitomized by the Chinese economy and Real estate segment is dividing the Chinese society’s social fabric.

China's Society Divide And Rising Black Money:

A recent Credit Suisse-sponsored study by a top economic think-tank has revealed that China's richest citizens may hold as much as 9.3 trillion yuan ($1.4 trillion) of hidden assets. The report has confirmed fears that nearly two thirds of all the unreported income goes into the pockets of the richest 10 %, widening China's wealth gap alarmingly.

Another very important element of the Chinese growth story is the government-sponsored abuse of the country’s human resource, the largest in the world. China is the manufacturing base of the world with cost effective products but not many people seem to understand that China has cheap labor mainly because the government literally robs most of their hard earned money by printing trillions and trillions of Yuan that were used to finance infrastructure project and to maintain cheap labor through a cheap currency. Not only are the Chinese workforces fighting with their lives, majority of Chinese peasants are hand to mouth farm labor who have no other alternative but to work at any cost to survive or to sustain their families in rural areas. What’s more shocking is that the migrant workers are forced to commit suicides in order to get a raise, but with the growing high misallocation of wealth, a petty wage increase is unlikely to solve the problem.

China Manufacturing Sector:

There is no debate the Chinese factories have mastered the art of producing cheap goods but with most global markets being saturated; Chinese factory owners are offering their products below cost price just to sustain the factories. As the world markets are getting bit tired due to high unsold inventory, reducing desire to consume non-essential items and high import bills. All the above factors are collectively reaching a breaking point soon that would definitely deflate the China bubble.

Analysts feel that the popping of the Chinese bubble is expected to have a global impact across major sectors of world trade. The great Chinese buying boom of raw materials and storing them has created big market bubbles in shipping, freight, raw material markets. If the factories are not able to sell their products, all the buying revolution is destined to slow down and thus prices of raw materials come to more realistic levels with global repercussions.

Environmental Damages: The Chinese industrial base is causing distress to urban landscape with heavy pollution, smog and extremely foul air with industrial residuals entering into water base, air and general environment causing extreme strain on Chinese Eco system. The average concentration of particulates in city air during 2008, for example, was six times the ideal standard recommended by the World Health Organization . The Chinese economy may be witnessed a definite boom but at what costs? Perhaps, the Chinese economy revolution has done more harm to the environment in the last 15 years what Europe possibly did in 150 years or USA in the last 75 years.

  • China's coal consumption jumped more than 7.6% last year, boosted in large part by increased demand for energy from smokestack industries.
  • Sixteen of the 20 worst cities in the world for air pollution are in China; acid rain falls on 30% of the country; and more than a quarter of the land is subject to desertification, an area that increases by 2,000 sq km every year.
  • The World Bank estimates that environmental degradation already shaves China's annual GDP growth by about 7% due to lost productivity from sick workers and wasted resources.

Chinese Stock Markets: As the world fought the global financial crisis, China was busy boosting government spending on infrastructure and social welfare projects, engineering a lending boom and re-pegged its currency to the U.S. dollar to support exports in response to the fallout of the global financial crisis. The measures might be effective in the short term with China's economic growth likely to exceed 9 percent in 2010, but have surely aggravated the imbalances that are at the heart of China's development story. The Shanghai composite index has been the worst performer in Asia this year. China's growth model is based on government-led investment and foreign enterprise-led export. As exports grew in the past, the government channeled income into investment to support more export growth. Now that the global economy is weak and China's exports are not coming back to earlier attained highs, there is not much income growth to support investment growth.

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