A Dwindling Chinese Workforce’s Impact on the Global Economy

China’s role as a low-cost producer has benefited the standard of living of its own population as well as the global economy. This status suppressed inflation, not only in China but also worldwide, including in the United States and Europe. Beneficiaries included U.S. consumers, who were able to purchase $9 polo shirts at WalMart and low-cost consumer electronics including cell phones and computers. This has begun to change. China’s role as the world’s low-cost producer has started to end, and will all but disappear over the next three to free decades. 

China’s rise to become the world’s second-largest economy relied largely on a tremendous increase in the country’s working-age population. From 1980 through 2015, China’s working age population increased by 380 million, an amount greater than that of the entire U.S.  population. Over this time period, In what was the largest migration in human history, hundreds of millions of rural Chinese moved to cities for manufacturing jobs, and to improve their existence as rural peasants.  

From the early 1980s through 2007, western manufacturers who had been automating their operations to decrease labor costs generally stopped. Instead, many moved their manufacturing operations to China. Technology and automation couldn’t compete with the low cost of Chinese labor, which up until 2002 approximated 60 cents per hour. In  2007, benefiting from its role as the workshop of the world, China’s exports exceeded those of the U.S. for the time. China became the world’s largest exporter and began to be referred to as the workshop of the world.

China now has a different problem. The country’s working-age population has peaked. What was referred to as a demographic dividend is now turning into a demographic time bomb. United Nations’ estimates indicate that by mid-century, 2050, China’s working-age population will have declined by 212 million. This decline will be equal to the entire population of the world’s fifth most-populous nation, Brazil.

China’s advantages as a low-cost producer are ending.  Over the past decade, wages and benefits have risen by double-digits as workers demand higher compensation. While the slowdown in China’s growth has reduced its labor shortage, the pressure on wages will increase in the coming decades as the number of workers continues to plunge.  

When energy costs are also taken into consideration, manufacturing in China is now a more expensive place to manufacture than India, Indonesia, Mexico, and Thailand.  

In late October, in a move that could best be described as “too little, too late, China announced that it was abolishing its decades-old policy restricting most families to one child. This will not have any short-term impact on China’s dwindling workforce, nor will it have any long-term benefit. Because of the decades of China’s one-child policy and the costs of rearing children, most Chinese couples still only want one child. For those couples who decide to have a second child, it will be 16 years before the country benefits from any additional workers entering the job market.

Adding to the growing shortage of workers, many Chinese factory workers are now returning  to their home villages to care for their parents. This will increase as the number of Chinese older than 60 is double to over 46 percent over the next 35 years.

Efforts by Chinese manufacturers to move labor-intensive, low-technology manufacturing to countries in Africa, Vietnam and elsewhere in Southeast Asia generally have not been successful due to cultural issues and generally low productivity. Trying to alleviate the labor shortage, China’s manufacturers have been automating at a rapid pace and sought to manufacture higher-margin and more value-added products.

The impact on western consumers will be significant. It’s not a pretty picture. The cost of manufactured products will rise significantly. It will have an impact on inflation. The increased costs for western consumers of manufactured products will result in an overall reduction in the western standard of living.

Author: Jeffrey Friedland (jeffrey@friedlandcapital.com)

Chinese Factory Workers

South Korea To Be The First Country to Issue a Chinese Renminbi-Based Bond

South Korea will become the world’s first nation to issue renminbi-based “Panda” bonds when it proceeds with a China bond sale next week. Panda bonds are bonds issued in China, compared to Dim Sum bonds, which are also denominated in renminbi, but are issued outside of the country. Korean officials will be in Beijing and Shanghai next week to start pitching $468 million of Renminbi-based bonds.

The Korean bond issuance is indicative of Beijing’s desire to internationalize the country’s currency.

This move by Korea is the next step of Beijing’s expansion of access to its domestic bond market by foreign institutions and central banks. The internationalization of the renminbi was part of a strategy by China to achieve reserve currency status for its currency, which was granted by the International Monetary Fund last month.

In 2014, as part of the internationalization of the renminbi, the United Kingdom became the first foreign country to issue debt denominated in China’s currency with the issuance of RMB4 billion of bonds in London. Russia also intends to raise US$1 billion in renminbi-denominated debt, with an offering anticipated to take place in Moscow next year.

Chinese bond markets are already the world’s third largest after the United States and Japan, with over $6 trillion of bonds outstanding.

Author: Jeffrey Friedland

New BRICs Development Bank Launches in Shanghai

Emerging Markets Yesterday was the official ceremony for the launching of the New Development Bank in Shanghai. Representatives from the five shareholders, Brazil, Russia, India, China and South Africa were in attendance. They collectively envisioned a more responsive and less bureaucratic alternative to existing global institutions including the Asian Development Bank and the World Bank.

The launch of the New Development Bank comes about a month after the China-led Asia Infrastructure Development Bank was also launched.

Both new institutions have similar objectives, creating global investment institutions in which developing countries have more influence than they do at existing global financial institutions. Both will start with the same capital, $100 billion.

While the Asian Infrastructure Development Bank will be limited to projects in Asia, the New Development Bank will not be limited to Asia.

Without South Africa, the other four BRIC countries who formed the New Development Bank represent more than 25 percent of the world’s gross domestic product and 40 percent of the world’s population.

To a large extent, the formation of both new financial development institutions was driven by the exclusion of the BRIC countries from influence at both the World Bank and the Asian Development Bank.

While the startup of any institution is challenging, I do have concerns regarding the long-term viability of the New Development Bank. The New Development Bank’s voting membership is equally shared between Brazil, Russia, India, China and South Africa. I have concluded that the potential for geopolitical tensions between the countries and each of the country’s own political and economic objectives could pose an issue.

The fact that the New Development Bank will be based in Shanghai is indicative of China’s desire to dominate the New Development Bank for its own global objectives.

The formation of both of these new institutions should be a wake up call to both the World Bank and the Asian Development to be more inclusive, or face increasing irrelevancy.

Author: Jeffrey Friedland

Jeffrey@friedlandcapital.com

Is China Once Again “Cooking its Books” on GDP Growth?

YuanThe Chinese government established a growth target for this year of “around 7%.”  For the second consecutive quarter, China exactly hit that growth target.  If it had been 6.9% or 7.1% it may have been more believable, but exactly 7% for two consecutive quarters? It’s just not credible. Is this another case of China “cooking its books?”

While it’s been suggested that “smoothing data” is OK, fabricating data is not acceptable. I’ve concluded that China’s economic bureaucracy, its National Bureau of Statistics, is afraid of backlash from President Xi Jinping if the 7% growth targets aren’t achieved. Therefore, I believe the growth targets are achieved!

China has a history of fabricating growth numbers.  Li Keqiang, now the country’s premier, once stated that the country’s GDP data was “man-made and therefore unreliable.”

Overall, China’s economy is weak. Some underlying data causes one to question the GDP growth rate, including the weakness in China’s industrial sector.  Industrial production, critical for the country’s, growth grew 6.3% year-over-year in the first half of this year.

Two other traditional drivers of growth also are significant. Growth in investment in fixed assets decreased from 13.5% to 11.4%. Retail sales, increasingly important, decreased from 10.4% from 10.6%.

Adding to the lack of credence in China’s growth rate,  global demand continues to be weak. Investment in infrastructure, a consistent driver of growth has been weak as local governments battle their own debt. Most importantly, much of China’s economy has not responded to four cuts in interest rates and adjustments in bank reserves since late last year.

Citibank has stated that it believes that China’s growth rate is closer to 5%. But even if Citibank’s growth rate is more credible, looking at China’s economy compared to the U.S. or Europe provides a different and more positive perspective.

The U.S. economy shrank .7% in the first quarter of this year.  The combined GDP of the 19 eurozone countries was .4% higher in the first quarter than in the last quarter of 2014.  Compared to the U.S. or Europe’s growth rate, even if China’s economy only grew 5% during the first half of this year, China’s growth rate is phenomenal.

Author: Jeffrey O. Friedland

jeffrey@friedlandcapital.com

Cuba: Dangers for Investors in an Economy Run by Revolutionaries

IMG_1058It was a historical photo op in Panama when Raul Castro, Cuba’s leader and Fidel’s brother, shook hands with U.S. President Barack Obama in April.  The question that came to mind was whether Cuba would soon be on the radar screen of American businessmen and investors.

In December, President Obama stated, “In the most significant changes in our policy in more than fifty years, we will end an outdated approach that, for decades, has failed to advance our interests, and instead we will begin to normalize relations between our two countries.  Through these changes, we intend to create more opportunities for the American and Cuban people, and begin a new chapter among the nations of the Americas.”

If a normalization of relations occurs between the U.S. and Cuba, America will finally catch-up with more than 100 other countries that have embassies in Havana.

While this change in American foreign policy toward Cuba was positively received by many Americans, including some, but not all of Florida’s  large Cuban-American population, I’m not sure how open the Castro regime will be to American investment.  While it’s critical for Havana to keep flowing the tens of millions of  dollars of transfers from Americans of Cuban descent to family members in Cuba, I’ve concluded that the former revolutionaries in Havana will not move quickly to embrace fully-opening the American spigot of investments.

Despite all the rhetoric and photos of beautiful beaches, thousands of colonial buildings and 1950s American cars, one must remember that today’s Cuba is still a totalitarian country. Cuba is on a very short list of countries still embracing old-style communism and centrally-controlled economies. Cuba and North Korea are at the top of the list of countries still embracing this failed economic model.

After the revolution, Cuba became dependent on other countries, first the Soviet Union, whose financial support dwindled when the Soviet Union fell, and then more recently Venezuela. With oil prices substantially down, Venezuela has it’s own economic challenges and its financial support of Cuba has substantially diminished.

It’s clear that Cuba’s leaders more clearly see the past than the possibilities for the future.  They remember when American companies dominated the Cuban economy before the nationalization of foreign property and businesses by Fidel in 1960. I don’t believe that Havana will quickly embrace a chance of the repeat of an American domination of their economy.

It’s one thing for President Obama to embrace a path toward normalization of relations with Cuba. It’s another discussion regarding Cuba’s ruling elite welcoming Obama’s overtures.

Today, Cuba is still a very foreign country for international business.  Memories of the revolution continue and are a mainstay of the country’s educational system. Three generations have now heard the government’s propaganda, regarding both revolutionary ideology and evil America.  Access to outside news is minimal. Few Cuban’s have access to the internet and mobile phones.  More than 70 percent of Cuba’s working population are state employees, who receive around $30 each per month in the local currency.  Cuba is it’s own version of the movie “Back to the Future,” which the Cuban version should be more appropriately titled, “Forward to the Past.”

Other countries including Brazil, China, Venezuela and the European Union have all had a head-start in Cuban investing.  If something goes wrong for any foreign investor, the nightmare begins.  Cuba’s courts have never ruled for a foreign business against the Cuban government or government entity.  The recent jailing after a secret trial, of British investors in Havana’s luxury Saratoga hotel, should be a warning to all potential foreign investors, not just Americans.

My conclusion is that Raul Castro, who has stated that he will step down from power in 2018, and Cuba’s ruling elite, are not going to quickly embrace President Obama’s overtures and open the floodgates of American investment.  Doing so would result in a flood of dollars from Cuban-Americans in the U.S., which would likely in short-order result in the economic power in Cuba moving from Havana to Little Havana in Miami and elsewhere in the U.S.

Author: Jeffrey Friedland

Beijing Acts and the Country’s Economy Rebounds

Image result for economic growth chinaWith summer around the corner, China’s growth outlook is very similar to what we saw just one year ago.  Beijing has unleashed a combination of fiscal and monetary loosening, combined with administrative actions to stimulate the country’s economy. The bottom line is clear.  If China’s government wants to increase short-term growth, they can and will.  My conclusion is that once again Beijing’s actions will generate the desired results. Actions that serve as a confirmation of Beijing’s push for short-term growth include the People’s Bank of China’s actions three times over the past six months to decrease its benchmark interest rate.  These actions by the central bank were combined with two reductions in  bank reserve ratios, coupled with very targeted liquidity injections. Where does this all lead?  Fort this quarter it’s likely that China’s quarter-on-quarter annualized GDP will increase to 6.9 percent. Full-year growth for all of 2015 will likely end slightly lower. This is close to Premier Li Keqiang’s growth target of approximately 7 percent for this year. What about the coming years? My conclusion is that a growth rate in the 7 to 7.2 range over the next few years is definitely a possibility.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets and facilitates cross-border equity and strategic transactions.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange-listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of All Roads Lead to China, an investor roadmap to the world’s fastest growing economy. It is available in both print and Kindle editions. 

He has been featured or quoted in numerous publications and media including the Wall Street Journal, USA Today, NBC News, CNBC, the South China Morning Post and Forbes, and is a regular contributor to the magazine Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets and global investing.

The Formation of the Asian Infrastructure Investment Bank, a Milestone for China

Emerging Markets In October 2014, China’s government formally established the Asian Infrastructure Investment Bank. Its stated purpose was to provide infrastructure financing for Asia.  The Bank was immediately seen by many as a rival global financial institution to the World Bank and the Asian Development Bank, and its formation was immediately attacked by the U.S. government.

Compared to the Asian Development Bank, with a capital base consisting of funds paid in and pledged of $160 billion and the World Bank’s capital base of $223 billion, the Asian Infrastructure Investment Bank will start with $50 billion of capital contributed by China. The Asian Infrastructure Development Bank has a goal of achieving $100 billion.

The key difference to the World Bank and the Asian Development Bank is the word “infrastructure” in the name of the Asian Infrastructure Investment Bank. This focus on infrastructure is key.

Reacting to the social and political objectives of advanced economies, including most notably the United States and western European countries, loans from both the World Bank and the Asian Development Bank not only provide funding for infrastructure but also social policy objectives including environmental protection and gender equity. In contrast, the Asian Infrastructure Investment Bank will focus solely on infrastructure development.

Infrastructure is critical for Asia and the continent’s economic and social development. Estimates indicate that $8.22 trillion in infrastructure investment is needed for Asia over the ten-year period from 2010 to 2020.  It’s easy to compare this huge infrastructure requirement to the minimal infrastructure investments made  by both the World Bank and the Asian Development Bank.  For the financial year 2014, the World Bank spent $24.2 billion globally on infrastructure and the Asian Development Bank’s total expenditures, which included infrastructure, totaled $211 billion.

The need for massive infrastructure development is clear when population and per capita gross domestic product are analyzed.  More than 700 million people in Asia live below the poverty line. Of these, more than half live in South Asia. Some of the world’s least-developed countries, those most in need of massive infrastructure development, include Myanmar, Cambodia and Laos. For comparative purposes, the most recent data indicates that per-capita GDP approximates $1200 for Myanmar, $1000 for  Cambodia and $1600 for Laos, compared to approximately $7000 for China and $39,000 for Japan.

Throughout Asia, infrastructure development is a necessity to provide and support economic growth, improve the environment and increase telecommunications and internet connectivity within the region and globally.

Key to Beijing’s decision to form the Asian Infrastructure Investment Bank was its conclusion that existing global financial institutions, most notably the World Bank and the Asian Business Development Bank, lacked the focus, desire or the resources to meet Asia’s infrastructure needs. Stated Bank infrastructure development objectives were identified as the construction of railways, airports, and telecommunications projects throughout the region.

China was also motivated to establish the Asian Infrastructure Investment Bank due to the lack of reforms at the International Monetary Fund, the World Bank and the Asian Development Bank to reflect an increased role of developing countries in the global economy. Based both on population and economic output, developing countries are underrepresented at all three institutions.

Governance of these global financial institutions is also a continuing issue for developing countries. The Asian Development Bank continues to be dominated by Japan and the United States, with each country having twice as many votes as China. This governance is a lack of acknowledgment of China having the largest economy in Asia and the world’s second largest economy.

While China’s economy is approximately the same size as that of the United States, it has less than one-third the number of World  Bank votes than the U.S. China’s voting power at the World Bank is only slightly more than that of France, which has an economy one-sixth its size.

The BRIC countries of Brazil, Russia, India, China and South Africa collectively comprise 21 percent of the world’s economy, and 43 percent of the world’s population, but their votes at the International Monetary Fund, the World Bank and the Asian Development Bank are miniscule relative to the size of their economies and populations. Together they hold 11 percent of the voting shares at the International Monetary Fund and 14 percent of the International Bank for Reconstruction and Development.

Five years ago there was an attempt to adjust minimally the voting at the International Monetary Fund, the sister institution to the World Bank. That effort failed, to a large extent due to the dysfunctional relationship between America’s President Obama and its Congress. The lack of progress in reforming the International Monetary Fund’s governance solidified Beijing’s resolve to change international finance by taking proactive steps to establish a new Asian economic order, with the establishment of the Asian Infrastructure Investment Bank as an early step.

The establishment of the Asian Investment Development Bank was a triumph for Beijing. Publicly and behind the scenes, America aggressively lobbied its allies to not participate.  When the bank was inaugurated, the American allies, South Korea, Indonesia and Australia were conspicuously absent.  While the U.S. indicate concerns regarding the Bank’s environmental impact, governance, labor and purchasing standards, the real reason was blatantly clear. The U.S. saw China’s role in establishing the Asian Infrastructure Investment Bank as a threat to the continuing dominance of global financial institutions by the U.S. and its allies.

For Asia’s developing countries, the strong U.S. opposition to the establishment of the Bank reflected a cold-war way of thinking that wasn’t responsive to their development objectives and their aspirations for their countries’ future.

As of mid-April 2015 the Asian Infrastructure Investment Bank had 57 countries as charter members, including America’s staunch allies, the United Kingdom, Germany, Australia and South Korea. Fourteen of the Group of 20 industrialized nations are now members. China, based on its gross domestic product, is the largest shareholder of the Asian Infrastructure Investment Bank, but as new countries join, its percentage ownership will decrease.

The establishment of the Asian Infrastrastructure Development Bank was a diplomatic success for China and a foreign policy and diplomatic failure for the United States.  To a large extent, the United States only has itself to blame for the Bank’s establishment.

The establishment of the Asian Infrastructure Development Bank by China is an event that is shaking up the post-World War II, American led, global financial order.  It should be seen by the United States as a real warning shot, is indicative of the decline of U.S. global power and the disarray of U.S. foreign policy. In the end, the U.S. failure to persuade its closest allies not to join the Asian Infrastructure Investment Bank, speaks for itself.

It’s logical to assume that China will rightly use the Asian Infrastructure Investment Bank to extend its influence in Asia, at the expense of the United States and Japan. If this occurs, it will be similar to how advanced economies used the World Bank and the Asian Development Bank to advance their own agendas over the past decades.

The establishment of the Asian Infrastructure Investment Bank is a platform for China to challenge Western-backed global financial institutions. The Bank should have a significant  impact on Asia’s developing countries and will enhance China’s role and stature in the region.

The Asia Infrastructure Investment Bank will bring billions of dollars of new investments to Asia and as importantly will provide a greater voice to developing countries in their development future than their current limited role at the World Bank and the Asian Development Bank.

The Bank will also provide China with an option for some of its large foreign exchange reserves of almost $4 trillion. specifically the repatriation of  some of these funds from Euros, dollars and Swiss Francs to development within its Asian sphere of influence.

My hope for China and all of Asia is that the establishment of the Asian Infrastructure Development Bank will jolt other global multilateral financial institutions to be more inclusive, and usher in a new era of global cooperation between mature and developing countires, which will benefit the entire planet.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of the book, All Roads Lead to China, which is an investor road map to the world’s fastest growing economy, which is available in both print and Amazon Kindle versions.

He has been featured or quoted in numerous publications and media including the Wall Street Journal, USA Today, NBC News, CNBC, the South China Morning Post and Forbes, and is a regular contributor to Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.