Obama’s secret wish

Wednesday, April 11, 2012

Obama Wishes He Was Chinese

By Rodney Johnson, Editor, Survive & Prosper

Obama can only wish he was Chinese. Or at least, that he was presiding over the Chinese economy.

You see, even though the impending death of the Chinese economic miracle has been widely reported, it hasn’t exactly happened.

Don’t get me wrong. We are among the doubters of the Chinese dragon. We don’t see the Chinese overtaking the U.S. in the years ahead. However, we DO have a caveat. There is no doubt the Chinese are headed for an economic fall… but it won’t happen today… or even tomorrow.

Just recently the Chinese government lowered (lowered!) its 2012 GDP forecast from a modest 8% to a paltry 7.5%. This follows the 9.2% GDP in 2009, the 10.5% in 2010 and the 9.2% GDP in 2011

Think about that for a minute. The second largest economy on the planet continues to grow at – or near – double digits. That’s nothing short of… well, a miracle. And, the growth in the last four years, plus the double-digit growth that preceded it, comes at a time when the rest of the world is fighting against deflation and contraction.

How are the Chinese doing it?

I’ll tell you. They’re doing it by controlling the economy from the top.

The Chinese Government Gets What the Chinese Government Wants

The Chinese are famous for an endless supply of cheap labor that will work at a moment’s notice and stay on task for 12 hours straight. These workers were recently farmers or, at least, people who left their rural homes in search of higher earnings.

There is no question the $1/hour- equivalent these workers now earn provides a better life for their families than did farming rocky land back home.

This flow of cheap labor from rural China isn’t a case of a handful of workers moving into the cities in search of work. It’s a case of millions of poor Chinese flooding into the cities.

In 2011, China reached the point where half its population lives in cities. That means there are still 650 million people – or more than twice the U.S. population – living on farms in China.

If and when the Chinese government wants these people to move into the cities to provide the next wave of cheap labor, it will tell them.

And they will respond.

Keeping it Not-Too-Hot and Not-Too-Cold

Then there’s the People’s Bank of China (PBoC) and its tight grip on credit in the Chinese economy.

The reserve requirement – that is the amount of deposits banks must hold back – is more than 20%. That’s twice what U.S. banks are required to maintain.

If the Chinese want to speed up their economy, they can simply reduce the reserve requirement. This action would flood their market with credit.

Remember, China is a growing economy. It has lots of new consumers who have new currency to spend. The great problem for Chinese shoppers is not that prices are too high… it’s that many goods are in short supply.

With almost limitless cheap labor, a rapidly expanding group of consumers and tight credit controls, there’s simply no way China will collapse today… or tomorrow.

Of course, there are huge structural issues in China…

The local provincial governments have vastly over-borrowed to fuel capital building. They will not be able to repay this money.

The government retirement program is also administered on a provincial level, and is woefully underfunded.

And, there are hundreds of companies on the Shanghai Stock Exchange that are government-funded, bankrupt entities.

The Ace Up China’s Sleeve

But China has an ace up its sleeve – it is a net exporter. It fills its coffers with foreign currency every second of the day. This allows China to remain a financial powerhouse, even though it has several structural issues internally.

Now, compare China’s situation with the good ol’ U.S. of A.

Are we growing at double digits rates? Nope. We’re barely growing at all.

Do we have a strong population of workers ready to take on jobs? Yes!

Will these workers accept jobs at world-competitive rates? Um, not exactly.

Do our banks have lots of firepower left? Well… No.

Are we a net exporter? No.

Do we have huge foreign capital reserves? Are you kidding?

You get my point.

China is setting up for a fall. Don’t doubt that. Its one-child policy is creating a gender and generational imbalance of epic proportions. As their current workers get older and the younger generation tries to figure out how to care for the elderly in an urban setting, there will be a massive adjustment.

This will happen. But not today. Maybe it will happen around 2020… or even perhaps closer to 2030.

In the meantime, expect fireworks on the Shanghai Stock Exchange as this roaring economy goes through expected bouts of turmoil.

And expect there to be another resurgence of investing in China as people come (back) around to the idea that this country is here to stay.

There’ll also be a lot of hand-wringing in the U.S., by politicians and economists, when that resurgence occurs, as the fear of a Chinese takeover once again becomes fashionable.


Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.