Despite recent news that Beijing may have replaced New York as the billionaire capital of the world, downturns in the Chinese economy may hit hard ahead of an important G20 meeting. Chinese stocks took a tumble recently falling 6% as political leadership has tried to reassure the country. That 6% slide is the average, however, with many stocks losing 10% of their value. That 10% loss is the lowest allowed in one day by Chinese policy, however, which may be hiding the true long term loss. How is it that China is in this position?
One of the reasons may have to do with the fact that China is currently a low end manufacturing country, something that it is trying to change. Despite the fact that many products that Americans use on a daily basis are stamped Made in China they aren’t products that have a lot of value. A Chinese made tee shirt travels across the Pacific, is loaded onto an untold number of trains and trucks, then sold at Walmart for 10 dollars. That doesn’t sound like a product that generates a huge profit margin. China may assemble the iPhone but the components are made in places like Germany, South Korea, and Japan. Chinese works may add 3 dollars in labor to the value of the final product.
Another reason Chinese markets may be slipping is that in the past few years China relied on government stimulus to help the economy along. There are dozens of reports of ‘ghost’ cities and railways. Officially China’s debt to GDP is 41%; unofficially no one really knows since most of that debt is in government owned banks. China plans on investing another 15 billion dollars in relocating workers in the next few years but where is the money coming from?
Members of the G20 may not be reassured by these statements and if that is the case global markets may be in for another tumble. With the fragile state of the world economy a recession in China would have global consequences. If China does try to shift its economy away from low end manufacturing too quickly it would set off a chain of layoffs, further depressing its economy. Over the past few years China has seen a slow down from its once double digit growth. Now may be the time we finally seen the effects of previous Chinese financial policies.
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