Dec 5, 2015

FAQ: Basic Understanding of China's Economy and How it Impacts Singapore

Much has been written about the slow-down of the Chinese economy but I realize that many Singaporeans have very little idea on how China manages to grow so fast and what is the foundation of the Chinese economy. I have compiled a short FAQ to give my readers a simple idea of how the Chinese economy came about and how it will impact Singapore.

How did the China Economy grew so quickly?
The Chinese economic reforms started in 1979 and using a similar development road map used by Japan and Singapore, the Chinese government focused on development of their infrastructure (roads, railway, real estate) and invited global MNC to set up their factories in China, to leverage on its huge & cheap population base. The Chinese government was able to roll out its developmental plans quickly due to central planning and they had been able to adapt existing technology quickly without the need for the typical research and innovation incubation period. China is now the world's second largest economy.

How fast did the Chinese Economy grow?
The Chinese economy has been growing at an average of 10% for 30 years until 2010 when the GDP starts to slowdown to 7%.

Food for thought: Essentially, the Chinese economy has not seen a recession for the past 30 years and there is a whole generation who grew up not knowing what a recession is like. Imagine how the typical Chinese young adult will react should the Chinese economy lapse into a recession. Riots and political unrest like Indonesia during 1997 Asian Financial Crisis?

What are the major sectors of the Chinese Economy?
The largest proportion of the Chinese Economy is based on industrial & manufacturing (46.8%), property (20%), service & consumption (20%), agriculture (13%).

What is the slow-down in the Chinese Economy caused by?
The key drivers of the Chinese Economy: Manufacturing and property, have reached its saturation point. There is only that much roads, railways and buildings you can build before ghost cities and road to no-where start to pop up all over the country. Given its strict stance on 1 child policy, there is not enough population growth to justify the building of new infrastructure and little need to replace any aging infrastructure since most of it is built recently. The slow-down of China's main export partners like US and Europe, along with an appreciating Yuan, rapidly increasing wages and property costs, have eroded the competitiveness of the Chinese manufacturing engine.

What has the Chinese government been doing to reverse the slow-down?
The Chinese government has been trying to re-orient the economy from a manufacturing/property based economy to a consumption model. However, the effort has been unsuccessful in the past few years with the % of consumption to GDP failing to increase significantly.

What is a Chinese Economy hard/soft landing?
The Chinese economy need not fall into a recession to see an equivalent of a US Great Depression during the 1920s. They just need to see their GDP fall to 3% to see mass unemployment and potentially civil unrest and economic hardship. That is what the economist term as a hard landing scenario for China. A soft landing scenario is where the China GDP is growing at 6-7% which is the data that the Chinese government is forecasting for the coming years.

What are the key risks of the Chinese Economy?
The Chinese economy is resting on a USD$26 trillion debt obligation, with many of it held by state owned enterprise and state government. There are economists who are optimistic that the Chinese government will be able to control the debt since it is owned by state-owned enterprises. However, similar scenarios have been played out in other countries with similar situation (Japan, Korea) and the end results have not been encouraging.    

How will a depressed Chinese Economy affect Singapore?
The Singapore economy has evolved over the years with China currently our largest trading partner, over taking previous trading partners such as Malaysia and US. The impact on our GDP should China falls, will be one of the worst hit among all the major Chinese' trading partners.

Holy shit! So when will that happen?
I am no God and I have no idea when will that happen. It could be next year, or it could be the year after next. Make sure that you have stock up on your emergency cash and have a plan on how to protect your wealth should the worst occur. If you have do not have such a plan, please talk to a financially savvy friend or adviser on what to do.

On 20 November 2015 the Baltic Dry Index reached the historic low of 498. The Baltic Dry Index is forward indicator of trade and economic activity around the world.

Winter is coming... Are you prepared?

Portfolio Performance
The portfolio has performed remarkably well during the month of November given that most of the global stock market has delivered a negative return. The cash portfolio is up 2.19% and the CPF-OA portfolio is up by 2.14% for the month of November. As the US central bank starts to raise their interest rates at the end of 2015, the financial markets will no doubt be even more turbulent than what we have seen in this year. I will pull back into the conservative portfolio again once the year end rally has run its course.

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