As more and more big and small businesses all over the world have started counting more on China for growth, the economic conditions in China have started to matter more and more to the global business community. With low market growth in the US, and the Euro zone crises raging into full gear, more and more small businesses are counting on China to keep serving as a strong export market. According to data of the US Census Bureau, the U.S. exported $326.4 billion in 2010 to the Pacific Rim in goods and services, up from $254.6 billion in 2009. That exceeded American exports to the European Union or to Canada. From 2000 to 2010, exports to the Pacific Rim rose 71.5 percent. China accounted for a major chunk for these exports. However, there are increasing trade winds rising on the horizon for continued Chinese economic success.
The Chinese economy has been expanding since 1977 at a phenomenally high growth rates, after the Chinese government slowly began to open up its economy to foreign investors. China has come a long way since then, with its GDP going from around $422 billion to nearly $6 trillion in 2011. So there has been a massive expansion in the economy, most of this growth occurred in the export sector as the Chinese government pushed a export-growth led model. However, this model looks like it has hit a wall and the Chinese government has pushed for a more domestic consumption oriented model. But domestic consumption is still at only 35% of GDP and it actually declined from 36% a year earlier. So China’s economy is still heavily tied to exports and this is likely going to continue for the foreseeable future, no matter how hard China tries to orient away from this model. The EU is China’s biggest trading partner, and if the Euro crises spins out of control, the biggest loser is likely going to be China. Then there’s still the sluggish recovery of the US economy, that is hampering China’s economy. Most people say that China weathered the global crises for the most part, but how is that possible considering that most of China’s economy is reliant on foreign trade, and most of those foreigners are having economic problems. The only reason China has managed to get through this crises, is because the massive stimulus that the Chinese government has injected into the economy since the crises. The stimulus accounted for nearly 60% of all economic growth, so most of the current growth is government spending based. By not allowing market forces to enact corrections in the Chinese economy, Beijing has simply inflated a property bubble to exponential proportions.
There is more and more talk of a property bubble in China among many analysts and economists. There is a huge surplus of high-rise condos in China’s cities that are too expensive for the average Chinese to buy. For example, an upscale apartment in Shanghai is many times the cost of a similar apartment in New York. This is considering that Chinese GDP per capita is a small fraction of America’s. Most businessmen say that China will be able to let the air out of the bubble slowly, since China has a huge foreign reserves to spend on any clean up of an economic disaster. But all those foreign reserves have liabilities against them, simply put that those foreign reserves are not free money for China to spend. In fact, there has not been a single government in recent economic history that has been able to deflate a property bubble without causing a massive economic crises. Japan had a lost decade of economic growth after its bubble burst in the early 1990′s, a similar case occurred with America after its sub-prime mortgage bubble burst 2008. And a similar thing will happen with China, and there are already some signs of it occurring.
Some property developers in China’s coastal cities began to slash prices on condos by 30% or more in response to the continued lack of demand. This in turn led to some riots and protests by existing home owners, who were angry that there properties were losing value. While this trend has yet to explode into a complete wildfire, the fact that these incidents occurred in the first place means that China is entering in the pre-stages of a bubble burst. Almost everything in China is based on property, many Chinese families who can afford the condos, have their wealth invested in property, similar to how most American families had their wealth invested in home equity. To top it all off, experts estimate that China’s property bubble is many times the size of America’s at its peak. With China building 15 million new housing units every year as opposed to America’s 2 million at the peak of its bubble. While most businessmen and companies think that China will deflate the bubble slowly and that there is no reason to fear, keep in mind that most people were saying a similar thing about America’s bubble and yet it still popped. So just because a lost of people are saying one thing, does not make it necessarily true. But what does this all mean for small businesses or investors doing business in China?
It means that you should be very cautious in the upcoming months, and seek to diversify away from China as soon as possible. This particularly applies to businesses involved in the construction industry or those who are directly linked with the property sector. Even if your business is not involved with the construction sector, anything consumer related is likely to suffer as well. Since, after the bubble burst in America, there was a marked drop off in consumer spending. And If you don’t want to take my word for it, just listen to some of the things that expert short-seller Jim Chanos, has to say about China. You can find a lot of his interviews with major business magazines on Youtube, and in case you don’t know who he is, he’s the guy who predicted the collapse of Enron and the implosion of the American property bubble. According to him, “China is Dubai times 1,000 — or worse”.