A Major Problem in China
The fact is, China’s at crossroads. The last 3 decades of amazing growth China’s experienced was because of an increase in inexpensive workers. China’s workers costs have jumped upwards lately, hence, if China really wants to continue modernizing in a quick speed (although not as fast as before), China must change itself a low end, manufacturing reliant nation to a nation that is reliant on high skilled workers. Achieving this one thing is difficult enough, but also usually needs time to work. Decades. Not often can this transitioning stage be completed within years. If China cannot rapidly transform its’ labor force from its’ current condition to some hi-tech, high skilled information labor force, China won’t break the economical barrier it’ll soon be facing.
However, the large problem comes to property. Westerners don’t have any real concept of how large an problem this really is. China’s economy has particularly slowed down. Many small companies have recently gone bankrupt, due to the surge in work costs, as well as their lack of ability to make a sudden switch to hi-tech, high skilled companies (altering so quickly is not possible). Many of the medium to large Chinese companies are making it through simply because they have considerable amounts of growing asset valutaions, which prevents them from going bankrupt. And the greatest (undoubtedly) asset that companies in China own is property (real estate).
To ensure that Chinese companies survive (remember, the economy has decelerate), they are depending on that property to keep its’ value, and never decrease. The small judicial government authorities will also be depending on property to keep it’s value. The reason being (you might not know) in China, local government authorities don’t have any authority to gather tax. All tax taken by the central government. Therefore the only supply of revenue for local Chinese government authorities is selling land, hence, naturally these local government authorities want the land’s value to advance upwards!
Meanwhile, many Chinese employees and low class Chinese are worrying that they can not afford to purchase homes (because of the property bubble). It has forced the Chinese central government to do something, which is to depress property prices. Therefore the situation in China is sort of a fight. On one hand you will find the central (federal) government is attempting to depress property prices, this way the folks are able to afford to purchase houses. On the other hand you will find the companies and also the local government authorities, who would like property prices to improve (or at best not fall), because they are reliant on that property to pay the bills. A genuine tragedy indeed!
What this signifies for America.
This only verifies my belief that stocks are headed for a big fall the coming year. The only reason American companies happen to be whistling along decently regardless of this recession is because of worldwide growth. And also the greatest driver (undoubtedly) of this worldwide growth is growing Chinese demand. Once China slows down (it already has), American companies will begin to feel the affect on the sales, and earnings will fall, and stocks will fall, and blah blah blah blah…… (I believe you understand). Obviously, a dismal Chinese economy will not immediately affect American corporate earnings. I am presuming that poor earnings is going to be seen following the traditional holidays bullishness for stocks.
This guest post was written by Investorz’ Blog, who teaches investors how to invest.
