Understanding the China Slowdown

The above picture actually paints a thousand words, nothing i can say or type will be reflected ever more clearly than the picture above ( thanks to Bloomberg btw)

Lets understand first how the China slowdown happened, for starters they are not a superpower country just yet and their massive economical boom for the past few years is owed to the following:

• Cheap labour that got many companies setting up their factory there
• Massive population that many companies want to target
• Huge export to the rest of the world, owing to their low cost structure

From the above you can see that besides their huge population; all are actually based on low cost structure. And the low cost structure cannot work for infinity when there are so many other countries that can actually offer lower costs. At the time of writing, the cost of setting up a factory in USA is actually now cheaper than in the coastal areas of China due to their rising labour costs. So many companies are actually insourcing their jobs back to America. Or they move on to lower cost countries such as Vietnam. So lower FDI is currently killing them.

Even point number 2 is flawed. We have suffered from something i call China Syndrome. You know how it works, there are 2 billion people in China, if everyone of them can give me RM1, i will be a billionaire. yes, your maths are correct Einstein, but look carefully and you would realize that out of the 2 billion people in China, how many can actually buy your product? ( will touch on this later)

Point 3, they need to export because they do not have the internal consumption capacity to absorb their surplus, but where to? USA is going to a slowdown (again), EU is imploding anytime soon, the rest of the world do not contribute much to the export market of China, so where to export?

All their economic boon structure is currently flawed. Even worse is what their country is going to do or have done!

Money being pumped into the economy to jump start it, and how is the money being used?

Well for starters the local municipals ( huge beneficiaries from the loans) built huge train stations and huge buildings that no1 ever uses, thus no income is generated. No income=loan default. But Chinese being Chinese, they are ever smarter. These municipals then sell their land ( all land belongs to the Government) to developers, got the money, get more loans ( who rejects free money) and start a building binge

The developers then build more houses, condos that no1 can afford to buy. Point number 2: So many people yet all of them are quite poor. When the developers cannot sell, run into trouble and cannot pay back the banks, so how?

Understand there are reports saying that the houses/condos being built are actually 80-90% sold etc. There maybe really rich people who buy up the whole floor, in one city is plausible but the whole of China? You really think that the rich in China can afford that?! Hell, even Warren Buffet and Bill Gates combined probably could not pull this feat off. There are also unsubstantiated reports that the condos/houses are sold to sub-prime people who never could pay back their loans. (Earning RMB 3000 and buying a RMB800,000 condo, you are so screwed)

So it is just one hell of a party China is in right now.

So now they are planning another cash injection which will lead to more building, more surplus and a bigger bubble. Sorry China, my best bet is that you are on course for a hard landing.