- Money Morning Australia

What Happens When China’s Economy Slows?


Written on 14 May 2011 by Kris Sayce

What Happens When China’s Economy Slows?

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.

If you’d like to know Dr. Cowie’s favourite African stock tip, click here to read his latest special report.

Cheers.

Kris Sayce
Money Morning Australia



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Kris Sayce
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 investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. 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. Read more about Publisher and Investment Director Kris Sayce.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


6 Comments For This Post

  1. Peter Fraser Says:

    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 Says:

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

  3. yy Says:

    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 Says:

    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 Says:

    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 Says:

    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 (??)



FREE INVESTMENT REPORT: Why Dividend Stocks Are The Key To Retirement Wealth


In this report discover how dividend stocks can give you income long into retirement — even if stock prices don’t rise.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom


This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…


The plan centres round three specific stocks.


To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'


The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?


Don’t sweat it. Click here for the next best thing…


World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3557.036-31.769 - -0.89%
  • ^FTSE6674.74-7.02 - -0.11%
  • ^AORD5520.500+18.300 - +0.33%
  • ^AXJO5536.400+18.600 - +0.34%
  • AUDUSD=X0.9293
  • USDJPY=X102.525

Graphic Ad 1 – Blue Chip Stocks Report


Revolutionary Tech Investor

This report is about TECH MOON-SHOTS


Four of them, to be precise.


It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.


For four more tech moon-shots, click here.

Gowdie Family Wealth

WARNING:
The worst mistake you can make when handing wealth on to your kids


This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.


And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.


Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST


Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.


This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.


You could lock in up to $20,000 a year - and that's just the start. See how here.



Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years


Greg Canavan
doesn't make forecasts like this often.


When he does, it's because he’s found something that could make you money for years to come.


Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted


Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week


In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Two days from now Australia will get a taste for what happens in American sports stadiums every day [Read More...]

Would you approve this chemical? Would you allow this to come to market? Table salt would simply not [Read More...]

If these lessons can be passed onto the next generation, what a world it would be. Healthier, genuin [Read More...]

3D printing is changing medicine, consumer products, art and manufacturing. The impact it’s having o [Read More...]

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

A high Australian dollar means we’re doing well at exporting. A low one means our trade balance is l [Read More...]

From the invasion of the Philippines to the Vietnam War…the US empire was financed by the rich, prod [Read More...]

China's economy has mightily affected the rest of the world. We will just have to be patient as [Read More...]

For us the pension and Superannuation crisis is all about demographics and ageing. It doesn’t really [Read More...]

Coming off successes in Iraq and Afghanistan, it makes sense that the US should send troops to Ukrai [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery