What Happens When China’s Economy Slows?

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Your editor is heading in to Washington D.C. this morning, so it’ll be a shorter Money Weekend than usual…

Where do you look to after China?

This week The Wall Street Journal reported:

“Now, the head of Li & Fung Ltd says the times are changing. Wages for the tens of thousands of workers his Hong Kong-based firm indirectly employs are surging: He predicts overall, China’s wages will increase 80 per cent over the next five years. That means prices for Li & Fung’s goods will have to rise, too.”

It’s something we’ve considered over the past few years. And it’s part of what has been troubling your editor in recent weeks… more on this during the week.

If China’s wages and other costs of production rise, how will it cope.

Think about it. China’s manufacturers have a competitive advantage thanks to their low costs.

But if, as is happening, costs are going up, that’s going to create big problems for the Chinese economy… and big problems for the economies that supply China.

So, if China and its suppliers are set to lose, which countries are set to gain?

According to an email sent to your editor late this week by Diggers & Drillers editor, Dr. Alex Cowie:

“According to The Economist, between 2000 and 2010, six of the world’s fastest growing economies were in Sub-Saharan Africa. The only BRIC (Brazil, Russia, India and China) country to make the top 10 was China, which came in second behind Angola – the fastest growing country in the world.”

That’s not all. The same email noted:

“The International Monetary Fund (IMF) says Africa will own seven out of the top 10 places for fastest growing economies between now and 2015. The World Bank raised its forecast for economic growth in Sub-Saharan Africa to 5.3% for 2011 – the highest forecast rate of growth outside Asia.”

What do we make of it? Simply this: China’s going to get the… erm… China treatment.

Economies with the ability to compete directly with China on price will do exactly that. And that’ll create a lot of problems for the Chinese economy.

And it will also call into question the huge infrastructure and building growth. Remember, China has built entire cities based on the anticipated urbanisation of the population.

Anything that slows the economy will necessarily involve slowing urbanisation and that means excess capacity – unoccupied buildings, unused warehouses, closed factories and empty ships.

Anyway, the Africa story isn’t new. In fact, it’s a story Diggers & Drillers editor, Dr. Alex Cowie has been banging on about to his subscribers since last year.

Cheers.

Kris Sayce
Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here.

 

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6 Responses to “What Happens When China’s Economy Slows?”

  1. Peter Fraser

    You are basing your expectations and possible outcome on the China production story, but there is another China story, and that is the China consumption story.

    What are your expectations if, as a result of growing wages within China they start to consume more of their own goods (a process that is occurring naturally anyway, but will likely accelerate) and also demand more “Western” produced goods.

    Would that dampen or increase the global demand for commodities? If the rise of internal consumption matches or shock horror races along faster than any diminished external demand (due to the increased production cost) then we may see Mining Boom number 3 very shortly – now why haven’t you examined the possibility of that, instead of just concentrating on the negatives, which can’t be denied, but neither can the possibility of alternate outcomes.

    Let’s get a little balance on this subject.

    Where should we put our Aussie dollars if you are half right?

  2. drood

    The next mining boom will be African (and Greenland), Ozzy commodities are too expensive.

  3. yy

    China consume their own goods? China and the US are different fish.. let’s remember that most of China is still rural and poor. They might consume their own rice and vegetables, but forget having a plasma in every house, like here and in the US.
    And as soon as the millions of factory workers have job issues or any small decline in Walmart’s supply demands, you can forget any notion of Chinese “consumption” as we know it.

  4. Peter Fraser

    I see that Soros has dumped all of his gold during Q1.

    http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-4-Soros-dumped-most-of-gold-stake-in-first–GWULT?OpenDocument&src=ea&WELCOME=AUTHENTICATED REMEMBER

    That link may not work.

    “Reuters

    BOSTON – Billionaire financier George Soros, who called gold “the ultimate bubble,” dumped almost his entire $US800 million ($A756.3 billion) stake in bullion in the first quarter, well before a commodities slump blamed partly on reports he was liquidating his holdings.

    Famed gold bull John Paulson held his ground, but Soros was joined in the retreat by several other big names, including Eric Mindich and Paul Touradji, according to 13-F filings with the US Securities and Exchange Commission that provide the best insight into where hedge funds are placing their bets.

    Soros, who has been bullish on gold in the past several years, cut his holdings in the SPDR Gold Trust to just $US6.9 million by the end of first quarter, compared with $US655 million in December, becoming the most high-profile investors to turn his back on one of the market’s best-performing assets.

    He also liquidated a five million share stake in the iShares Gold Trust, the filings showed. His total holdings in gold-backed ETFs was $US774 million as of December.”

  5. InvestConsultants

    Very good Kris, Btw “China’s wages will increase 80 per cent over the next five years…” based on average $300 to $400 per month include social insurances they will keep competitive with developed countries for long yet… , as Peter is perfectly right too, more money gain every month, actually average $770 for a secretary job in shanghai (+100% since 2006), make people feel they can spend much more, and you just need to come china to see how and where to be totally amazed…! That’s Include the last 46-52″ LCD TV generation in every apartment YY…

    Best Rgds,
    TD

  6. Gammans

    Excellent observation Kris. My son was pointing out how all the Chinese students are such slavish copiers, work so hard and end up just upholding the (increasingly doomed) status quo. They lost their collective minds long ago. He said you could sit a bunch of Chinese students down in front of a hobo or an Australian aboriginal and tell them they were the bosses and they would wait, notebooks at the ready, to record their wisdom. And maybe that is indeed what they should be doing. Remember, it starts at school and there are three kinds of people. The A’s, the B’s and the C’s. The A’s end up teaching (the US etc), and the B’s (the Asians) end up working for the C’s (??)

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