The following is guest post by Neal Frankle who is a Certified Financial Planner in Los Angeles. He also is the man responsible for Wealth Pilgrim.
Conventional wisdom has it the China is about ready to take over the world – if they haven’t already done so. One day you read about the new Chinese Stealth Bomber. The next day Chinese President Hu is sipping Pepsi with President Obama on the White House Lawn. Where does it end?
Investors are all but certain the American Dollar is finished and the Chinese Yuan is the new leading currency of the world. As this unfolds, investors ask themselves if they shouldn’t pile into China as well. Some people are even taking weekend jobs just to have a little cash to invest in the Orient. Of course I can’t predict the future but here are a few reasons to reconsider this option:
1. China GDP
While the Chinese have the third largest economy in the world it also has a heck of a lot of people. If you divide the Chinese economy up by the number of people living there, their economy looks like yesterday’s take-out food. China produces only $2800 in goods and services per person each year according the Investors Business Daily. Meanwhile, back on the range, the USA produces $42,000 in goods and services per person. That means we are much more productive.
2. Economic Freedom
Politics aside, economic freedom creates wealth. Economic control increases poverty over the long run. Freedom means people can invest and reap the benefits of their efforts. When that happens you get lots of innovation. When that doesn’t happen, you don’t get innovation. China ranks 135th out of 179 countries when it comes to economic freedom. The USA ranks 9th. Even though we’ve got plenty of problems is America, where do you expect to see the next big thing invented? Shanghai or Silicon Valley?
3. The Model
The Chinese have created huge surpluses by churning out very inexpensive products and selling them abroad. How do they do it? By making sure their people earn next to nothing. While the West has largely invested in the future by creating machines that help people become more productive, the Chinese have not. That does not bode well for their economic future.
4. They Own Us – But We Own Them
While it’s true the Chinese own almost $3 trillion in American debt, they have more to lose from a weak dollar than we do. If the dollar became very weak relative to the yuan, the assets they own would lose a lot of value. On top of that, if the dollar lost value, we wouldn’t be able to buy so much cheap production from the Chinese. That means less business for them. They have no interest in a cheap dollar.
5. Population
Long thought to be an asset, the Chinese population is actually their greatest problem. Let’s not forget that the Chinese have had a one-child policy for over 40 years. While their population will grow over the next 15 years, it will start to decline as older workers have fewer younger workers to replace them. In the West, we’ve been able to put machines in place to make up for workers who leave the job. We also have lots of people who are beating down the doors to live here. The Chinese don’t.
6. The Rare-Earth Metals Lie
China is the world leader in production of rare-earth metals required for advanced technology items such as cancer treatments, missiles, hybrid cars and solar panels. They don’t have most of the metals on earth…they just produce most of it. While they have a monopoly control over these expensive metals now, it probably won’t last. Western countries will wise up and bust through the red tape that has moth balled the refineries and factories needed to produce these rare metals. Once they do, the Chinese monopoly will fold like a ping pong table.
The Chinese are spending a lot of their new-found treasure on a military build up. There is no denying they are a huge military power. But as far as investments go, don’t fall for it. They’re workforce is the reason they have built their wealth. And that asset is aging, being controlled, not well trained and unable to leverage outside forces to become more productive.
If you’re looking for the best investments, I’m just not convinced that China should be on your list.
While anything can happen in the short-run, you should rethink your position if you are convinced that investing in China is a slam dunk for the next 20 years.