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What does the future hold for the economy in China

What does the future hold for the economy in China

What does the future hold for the economy in China?  While growth there continues to surpass by a significant margin, the stagnant, if not troubled, western economies, I sense “a disturbance in the force”.  Moreover, I would advise caution with respect to reported growth rates, not a lot of transparency there, when considering first or further investment.

To begin with, the business environment can be challenging for foreign companies.  Regulatory and licensing requirements are difficult to navigate and time consuming.  Local corruption has been well documented and seems to be accepted pretty matter-of-factly by the federal government.  In a quest for more revenue, perhaps brought on by a slowing economy, tax laws seem to change somewhat quickly with emphasis on stricter standards;  so, taxes are more burdensome, the rules more arcane.   Not what you’d expect from a flourishing economy, especially as is typical nearly everywhere else, one seeking foreign investment to stimulate growth.  Lastly, the competition for qualified people is pretty stiff, expect to pay up.

For years, with no middle class to speak of, China relied very heavily on its exports.  Inexpensive labor helped, but exports were facilitated largely by currency manipulation.  The renminbi (RMB), more commonly referred to as the yuan, was and continues to be held at very low levels by the government so that exports can be priced cheaply against goods from other, competing countries. 

Now the chickens are beginning to come home to roost a bit.  Tough economic circumstances literally around the world are dampening enthusiasm for Chinese exports, no matter how cheaply priced.  All the success of the past decade has resulted in the development of a middle class with appetite for consumer goods, e.g., fashion, cars, upscale housing, etc.  Like any other middle class, people find themselves having to borrow to keep up.  Inflation was/is inevitable and the government will have to solve that difficult puzzle- raise the cost of money to stem inflation or lower it to stimulate growth.  As we know from past experience, tough one.  And let’s not even get into China’s reliance on imported oil and other commodities, manageable at current levels perhaps, but oil at $150 to $200 per barrel would be quite another story.  Witness the latest effort to buy up foreign energy companies.

As for the Chinese banking system, my assertion is that it’s a house of cards. Not only is the housing market beginning to slow if not decline, but also the lack of controls and regulatory oversight is pretty scary.  Don’t know for sure, but a housing crisis coupled with a need for bank bailouts by the government would not be a surprise.  What might be a surprise would be full disclosure of such actions, don’t count on it.

Of course, the outlook is hardly negative, there’s still a lot of horsepower in a country with over 1.3 billion people.  But remember the Japanese “Miracle Economy” of the mid to late 80’s?  When considering investment or committing to a business plan for China, one would be wise to temper one’s expectations.