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raymondusa (raymondusa)
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China is Set to Deal With World Economic Slowdown

China is Set to Deal With World Economic Slowdown

A slowdown would even help China rebalance its economy, World Bank says.

By . Agence France-Presse

Sept. 13, 2007 -- China is well placed to deal with a slowdown in the world economy and its conservative investment strategy has helped limit the impact of the U.S. Sub prime crisis, the World Bank said Sept. 12. Strong fiscal and trade positions will allow China the room to adjust its policies and respond to a slowdown in the world economy despite an unavoidable weakening in Chinese exports, the World Bank said in its latest quarterly update on China's economy.

"China has a very strong macroeconomic position when you think about fiscal position, external position," senior China economist Louis Kuijs said. "That means that China would have the room to adjust macroeconomic policies if there is a slowdown in the world economy."  He said a moderate slowdown could even help China rebalance its economy, which roared ahead at a breakneck 11.9% in the second quarter, with a surging trade surplus and high inflation two of the major concerns for Beijing.

It is also unlikely that China will suffer too much pain from the troubled U.S. Sub prime mortgage market, where massive defaults have triggered a wider credit market crisis and roiled global financial markets, the bank said. "The (impact) on China from a credit tightening which we have seen in some of the other emerging markets (is) all fairly limited," said Bert Hofman, the World Bank's lead economist for China. That is because China's rather conservative investment strategy has prevented major capital outflow, he added, noting that the central bank has denied any Sub prime exposure in the $1.3 trillion foreign exchange reserves.The World Bank forecast that China's economy would grow by 11.3% for all of 2007.

My take:

With slowdown in the world economy, especially with US slowing down a lot, for a variety of different reasons including mortgage defaults, real estate sector battered, credit squeeze, liquidity problems, US government and consumer sectors already burdened with huge debts, it’s a good time to see how this may affect China for the foreseeable future.

Firstly, China’s total MBS investment is only 2.7% of Total USA Agency MBS, making it relatively insulated from the Sub Prime meltdown.  Most of the subsequent reports from a variety of different sources affirm that China’s exposure is relatively minimal.

Secondly, China is rebalancing the sector contributions of each GDP sector.  China has very large reserves, and the Chinese consumers have very large savings, estimated at over 40% of GDP.  Another words, these two sectors have more capacity to consume and contribute to GDP growth.

However, I don’t subscribe to the idea that one must grow an economy just for the sake of growth.  Some people ignorantly assert that you can just grow an economy out of economic trouble.  The better test, the one that we use in the real world, instead of the theories spun by insular economists, is to see if an action results in a stronger financial bottom line.  The true test is not GDP growth, but actions that result in stronger financials.

Looking at the components of China’s GDP:

C: Large savings, available for spending.  We are starting to see more contributions from C.  That’s one reason the World Bank revised the GDP numbers upwards to reflect contributions from Consumer spending.  This sector has a large upside for further economic growth.

I: No shortage of investments.  China actually has too much liquidity trying to find more investment outlets.  What you are seeing in the SC market is a symptom of too much liquidity and not enough investment options.  Increase investment options, like allowing Chinese citizens to invest in the HK market is a good start.  There is an estimate of $1.3 trillion in reserves, and $2.2 trillion in consumer savings.  I feel the second number is grossly underestimated, because there are many Chinese like my relatives who don’t even have the bulk of their savings in Chinese banks or financial institutions.

G: Large savings, available for spending.  This sector has a large upside for further economic growth.

NX:  China should not depend on exports to US, since US is slowing down.  China should continue to rebalance its economy, emphasizing (C,I,G) as the main economic drivers, and continue decoupling from US.  The World Bank is acknowledging this transition by revising up the GDP numbers to reflect more growth from the consumer sector.

Barring any unforeseen anomalies, I expect China to continue decoupling for US, becoming a more domestically driven economy,  invest outside China, not as some people suggest, just to provide vendor financing, but for geo-political, geo-strategic, vertical integration of raw material supply lines, invest in R & D especially for industries like green renewable alternative energies, and more Joint Ventures with countries around the world, so the end result is a rebalanced Chinese economy, firing on all cylinders as all sectors are contributing to China’s future.

2007-9-15 01:39 AM

interesting (Steven Schreiber)
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Yeah... we all know that vertical integration is where it's at.... did you miss out on the 1990s or something? I mean... you do remember when vertical integration went bust, right?

2007-9-15 08:48 AM

chinadaily (chinadaily)
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sure

I would agree China's central bankers and top economic policy-makers take notice of "raymondusa" suggestions that a gradual trade/economic decouping with USa.

That China should not and must not always contribute to world price stablization by providing them with inexpensive manufactured goods. the government needs to beef up investment in the rural towns and even village facilities (road, gas, tap water, farmer' welfare etc). Yes, I also agree that this country needs to cooperate and nurture better economic and political relations with African, south american and asian countries, that remain relatively poor but has the great potential to get rid of it, by welcoming China's Joint Ventures on their lands.

2007-9-15 09:47 AM

raymondusa (raymondusa)
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schreiber, er interesting (at least think of a nickname more interesting than, interesting)  How lame!

You are wrong, as usual.  Vertical integration is alive and well and used in many industries.

Not that I expect you to understand since a flat broke guy like you, focused on the wrong things like logic and theory, which got you nowhere, hardly qualifies you for an intelligent and credible analysis.  You don’t have credibility to give economic analysis.  That’s why I keep telling you to get to a large city so you can first find a job, be gainfully employed, stop wasting your time writing a useless book on human logic, and finally, gain some real world experience so you know why I wrote about integration of raw material supply lines.

I’ll give you a clue.  It’s not to make more money.  I use vertical integration for my business.  I see Buffett invest with ideas to create vertical integration.  I see Microsoft, Apple, GE, Wal-Mart, and many Fortune 100 companies use vertical integration too.  Read their Prospectus and you would know that (not that you have any money to invest anyway).

So when you wrote vertical integration went bust, with is factually wrong, you obviously reinforce how little you understand the real world of business.  Logic and theory got you nowhere.  If you enjoy living a minimalist life in Oklahoma, that’s your problem.  But those of us who own and operate businesses in the real world, not only use vertical integration as a business strategy, but also understand why it is an important part of the overall strategy. Perhaps if you ever get some real world work experience, you might one day see the wisdom in this strategy too!

chinadaily:

I don’t think this schreiber understands the vertical integration I’m talking about.  Just look at his response!

One other thing I suggest is for China to create attractive incentive packages:

1) To retain the smart Chinese students, especially in sectors like High Tech, Banking, Finance, Marketing, Management, etc.

2) To attract the Chinese Ex-Pats to work in Joint Ventures to further this effort.  Just like it has done a good job creating policies to attract foreign investments, it can also do the same to attract smart people around the world, to help it in these high demand areas.

3) This is not to downplay the Chinese in China, but strategic planning ahead means sourcing people from countries that you want to Joint Venture or do business down the line, who are already well familiar with the culture and the customs unique to that country.  Having that familiar face will help bridge the gap and make these Ventures easier to plan and execute.  This is about thinking strategically, instead of tactically.

2007-9-15 10:34 AM

wanzheli
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bank on our domestic market

we should not put too much weight on exports
china's internal market can be big enough to sustain relative economic growth as long as we make some changes to gdp distribution structure
also the end of economic growth is to provide welfare to its citizens ,not the boosting trade volume

2007-9-15 11:53 AM

sampak
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I keep saying, put a tax on exports to the US. That will encourage economic development of other sectors.

2007-9-15 12:09 PM

interesting (Steven Schreiber)
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Raymond,

I never said that vertical integration was dead, I said that it was no longer the main priority. What do you think outsourcing is?

2007-9-15 01:56 PM

msaeed
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QUOTE:

Originally posted by raymondusa at 2007-9-15 01:39
... I: No shortage of investments. China actually has too much liquidity trying to find more investment outlets. What you are seeing in the SC market is a symptom of too much liquidity and not enough investment options. Increase investment options, like allowing Chinese citizens to invest in the HK market is a good start. There is an estimate of $1.3 trillion in reserves, and $2.2 trillion in consumer savings. I feel the second number is grossly underestimated, because there are many Chinese like my relatives who don’t even have the bulk of their savings in Chinese banks or financial institutions.

data from national bureau of statistics reveals that the saving deposit of urban and rural chinese citizens in china has reached 9.43 trillion yuans. but don't forget that china's population surpasses 1.3 trillion. this works out the average saving deposit around 7143 yuans per person. strictly speaking, this amount is not enough for a stock trade in the hongkong stock market.

the new rules to allow chinese citizens to invest directly in overseas stock markets sounds liberal. but china has a long history of corruption. i am under an impression that this rule is designed to facilitate large scale money laundering. i might be wrong.

back in 2005, an audited report reveals that the bad assets for the four major state commercial banks totaled $408 billion. at about the same time, the western economies were booming. the west is apparently the biggest beneficiary of china's corruption. i believe this is the reason why the main-stream media tries to downplay of issue of money laundering in china.

2007-9-16 09:55 AM

exportedkiwi
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Reply #4 raymondusa's post

I agree with your 3 points at the end of your post but I don't agree with your attack on interesting......play nice!
What's VI? Never heard of it!

2007-9-16 02:33 PM

interesting (Steven Schreiber)
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Kiwi,

Don't worry about it. Raymond doesn't really know what he's talking about, which is why he's never quite able to explain why someone is wrong. Read his posts carefully, most of them are lists followed by a guess with nothing tying them together.

2007-9-17 09:34 AM

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raymondusa (raymondusa)
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sampak:

Just to play Devil’s Advocate for a moment, I think taxing exports, will set up reversed punitive taxes, tariffs, and other protectionist measures from the US, and since the majority of China’s exports to US are actually from US MNCs exporting back to US, that may just end with unintended consequences that don’t truly help encourage the other sectors of China’s GDP growth.

Rather than look at punitive taxing measures, I much rather focus on affirmative taxing policies to encourage the end results desired.  For example, in USA, one reason the real estate sector makes up such a large part of domestic investment is because our real estate taxing policies, from acquistion, to operation, to disposition, attracts people to invest.  For qualified investors, there is also attractive financing to help enhance return, and expand available investment opportunities.  If you want to change people’s investment and consumption patterns, reward the outcome desired, with tax incentives, tax credits, other tax benefits, and create favorable financing to help encourage these changes.

I feel it is usually easier to attract the results desired, with favorable incentives, than to discourage unwanted results with penalties.  Furthermore, these tax incentives are directly aimed at changing China’s domestic consumption and investment patterns, and don’t depend on other countries to cooperate.  Taxing exports to US would require some cooperation from the exporters, and at best, it is an indirect and inefficient way to encourage domestic changes in China.

interesting (schreiber):

First you wrote vertical integration went bust.  I corrected you, and then you backtracked to it was no longer the main priority.  How pathetic as you are reduced to wordplay!

I don’t know what is your core competence but it certainly isn’t economics and business, as your lack of results speaks for itself.

You are better off spending time getting a job and gaining some real world work experience, instead of wasting time writing a book on human logic.  Logic and theory got you nowhere.  Living a minimalist life out in Oklahoma is not a worthy accomplishment.  You should be embarrassed.

It’s amazing you retain the temerity to talk, when you accomplish so little with your brand of logic, and useless theories.  Get a clue!  If your thinking, theories, and logic were correct, you would not be flat broke.  Results matter.  Credibility matters.  Do yourself a favor and ask yourself an honest question, “Why are you where you are today, reduced to living only a minimalist life?”

Smart people understand when they are going down the wrong path based on their lack of results.  Your lack of results should have awakened you to reality, but apparently not!

How sad!  I pity you.

msaeed:

The 1.3 trillion in government reserves, and estimated $2.2 trillion in consumer savings are in USD, not RMB.  I think the second number is grossly underestimated.  China’s restrictions on the movement of money in Chinese banks make it less attractive as a main banking option.  But as China continue privatizing these institutions, and or Joint Venture with other international banks, I expect more investing options to come, and fewer restrictions on movement and investment of those savings.

exportedkiwi:

How I respond to schreiber is my business.  I don’t need you to tell me how I should respond.

2007-9-17 12:03 PM

#11

exportedkiwi
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Reply #11 raymondusa's post

Didn't tell you, more like strongly suggested, but that's not what's important. What is is that I have no idea what VI is, please explain that one.

2007-9-17 02:13 PM

#12

interesting (Steven Schreiber)
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Raymond,

I accomplish so little with my theories and logic? I don't think you know enough about me to say that. My thinking, theories and logic are fine.

The reasons that I am reduced to a minimalist life are: (1) I place my value on things that do not pay well in the short run but have larger benefits in the long run; (2) my savings approach 75% of my income (as would be expected from the first reason); (3) of my highest goals, the intersection of those goals and goals that will be significantly advanced by a doubling of my income is rather small (other goals benefit from increases in income, but those increases are enormous). As to results, I am generally quite pleased with the results my life has generated. I have a bustling internal mental life, I read interesting material and I write interesting essays (albeit, not very interesting to people like you or anyone here, and thus they do not appear here, ever), I'm friends with many people that are highly advanced in several fields and retain a staggering number of options both personally and professionally.

Why do I have so many options and not so many "results"? Because I haven't cashed them out, I'm a cautious investor when it comes to my future and the decision of what to do on a permanent to semi-permanent basis is taken seriously and slowly.

2007-9-17 02:43 PM

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interesting (Steven Schreiber)
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Kiwi,

Vertical integration is the acquisition or creation of the processes necessary to complete a supply chain. VI can be limited, creating just the manufacturers of various parts, or it can be extreme, like owning even the mines for the metals that compose the parts. This should not be taken to exclude consumers as "retail" is part of the supply chain. Thus the furthest extreme would be ownership (from "lowest" factor to highest): mines, ore processing, material processing, part manufacturing, part shipping, subassembly, final assembly, warehousing, marketing, distribution, retail. Obviously not every business needs the mines, but you can substitute the various processes across sectors to get the same picture. You can divide companies into separate business units at pleasure as they are often things that may as well be separate and the map of the vertical structure becomes a bit complex.

My contention is that, while vertical integration was a big deal in for a long time, it has fallen off significantly with many many more parts of the company's supply chain being sourced in other firms because there are advantages in terms of risk exposure, external expertise and sometimes regulatory advantages (a company that has India do all its steel refining and now just does the marketing has just eliminated pollution control as a cost, for example, while not having to develop expertise in running a steel mill in India).

2007-9-17 02:57 PM

#14

raymondusa (raymondusa)
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interesting:

It's human nature for you to emphasize your potential because you don't have real world results.  People who truly have real world results, don’t need to emphasize potential, as their real world results speak for itself.

You remind me of a leasing agent I once knew.  He was a big talker, full of grand theories, strategic ideas, but lack any meaningful tactical successes or results.  While I appreciate Strategic planning, the person must show tactical, near term results consistent with the longer term strategic plan, otherwise it is just useless talk.

I know you don’t have much real world business experience.  How do I know that?  Firstly, you couldn’t use basic business, finance, and economic terms correctly.  Secondly, you rely too much on theoretical and textbook answers to compensate for your real world business shortcomings.  Your definition of Vertical Integration was pretty much a textbook answer.  Between using basic business terms incorrectly, and giving more textbook answers, you continue to affirm what I’ve been saying about you, that you don’t have real world business experiences to show you can apply textbook theories to real world situations.

If you contain your ego for a moment, you may realize that living a minimalist life is a circumstance you created with your current thinking.  Einstein once said, “You cannot solve a problem, with the same mind that created it”.  It’s simple, yet profound.

Tactical successes by way of results, help affirm that you are going in the right direction towards your strategic goals.  But the rhetorical question for you is, “Will your ego prevent you from honestly seeing something so simple?”

exportedkiwi:

Schreiber gave you a textbook definition of Vertical Integration.  While I’m fine with his textbook definition, I think it is more informative for people to read a real world application of Vertical Integration, as this idea is not only for Fortune 100 companies.  Schreiber has such a narrow textbook understanding of Vertical Integration that he mistakenly asserted it went bust.

Anyone who owns or operate a business can use Vertical Integration to improve their operations.  Whether your business is delivering a product or service, it involves different steps from the beginning to the end user, where you can integrate some of the steps to improve the overall process.

Several years ago, I purchased an apartment building with an existing property management team.

The problem:  The existing property management team got a flat salary, and some minor bonuses (regardless of the results they produced for me).  That contract was great for them, but not for me.  This building was under performing, and one reason I was able to purchase it for a bargain price.  This was a classic turnaround building.  The existing management team didn’t have the right  incentives to turn my building around.  They got a salary, contractually, regardless of results.  The previous owner lost millions in potential appreciation (since income property is valued by cash flow) because the existing management didn’t deliver the results.

The Solution: After I acquired the building, my first order of business was to replace the existing management team, with a new management team.  Secondly, I changed the compensation for the new management team.  They got a small salary.  They also got a percentage of future appreciation, based on the increased value of the building as a result of their management efforts.  There were clearly defined benchmarks in terms of increased revenues, and decreased expenses that they needed to achieve, during their one-year contract, and if they achieve it, they got a percentage of appreciation.

The main point is:  I integrated the new management team into the process of my product, rental housing, and gave them incentives to achieve the results I desire.  By making this one change, integrating them into the process, and giving them a percentage of future appreciation based on achieving the desired result, thereby creating a vested interest for my management team to maximize my cash flow to maximize the appreciation and value of this building, we both won.  The more money they helped me make, the more money they made as a percentage of appreciation.  This arrangement worked out so well, that I changed the compensation structure for my other managers after their existing contracts expired.

The lesson here was:  Integrate people into the process and create a vested interest by rewarding them with incentives to achieve the same outcome you desire.  This was an example of Applied Vertical Integration, and not just textbook regurgitation as espoused by schreiber.

2007-9-18 10:53 AM

#15

interesting (Steven Schreiber)
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Raymond,

That's not vertical integration, that's just shifting the incentives.

2007-9-18 01:12 PM

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exportedkiwi
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Reply #15 raymondusa's post

So it's kinda like ownership without equity, using your example with your buildings etc? people can own their jobs and problems, does that mean it's VI too? Forgive my stupidty, but it's always good to learn new stuff.

2007-9-18 01:35 PM

#17

raymondusa (raymondusa)
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interesting and exportedkiwi:

Regardless of whether you have a product or service, there is a process from the beginning of a product or service, until in reaches the end users.  In this case, my product is rental housing.  My end users are tenants.

Vertical Integration – Generally is referring to ONE product/service to ONE group of end users.  Regardless of how many different people work in this process to deliver this product or service, to ONE group of end users, it is still Vertical Integration.  I did change the compensation and incentive program so the new management team can have a vested interest to achieve the results I desire.  But the main reason why it is still VI is because we still have just ONE product to ONE group of end users.

Horizontal Integration – Generally is referring to more than ONE product/service to the SAME group of end users.  Example:  Taco Bell and KFC in the same building selling to the same customers.  Banks selling their existing banking customers, insurance and other financial services, etc. is a second example.  Starbucks in grocery stores, MacDonald’s in Wal-Marts are more horizontal examples.  It’s horizontal because they have multiple products or services, selling to the same ONE group of end users.

Therefore, you can say VI is about improving the process to deliver your product or service to the end user.  HI is about retaining the customer you already have by expanding your product line or services offered, to fill the additional needs of your end users. HI is also about capitalizing on making collateral sales, and generating additional revenues with the same ONE group of end users.

It’s not really about ownership or equity, since my new management team doesn’t have either with me.  I just structure their compensation so there is enough incentive for them to achieve the results I desire, creating a win-win situation.  When they truly feel they have a vested interest in the same outcome and are part of the process, they deliver results consistent with that feeling.  It’s back to understanding human nature and what drives people towards certain results.  I found it is easier to reward the result you want, rather than penalize the result you don't want.  It's the same reason why  I don't charge late fees for late rent, but I do give rent discounts for rent paid on time.

2007-9-20 01:42 PM

#18

interesting (Steven Schreiber)
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Raymond,

Well, my problem with your example was simply that you didn't add a new process, you just improved the function of it by creating more appropriate incentives than those that went before. Though the inadequacy of the former incentives both surprised and didn't surprise--I am always surprised at how few people understand incentives but that means I shouldn't be--changing them doesn't really add a new process, it just improves the function of an existing one. An example would have been if the property used a property management firm and you had created new, in-house management so that you could control the incentives properly.

2007-9-20 02:05 PM

#19

raymondusa (raymondusa)
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interesting:

You misunderstand VI as creating new processes, when it is really about improving the CONTROL of the process from the beginning of a product or service, to the end user, to achieve the desired result. While that can include creating new processes, it’s not necessary. I rather accomplished greater control without having to create more processes outside my forte.

I don’t need to create in-house management to have greater control of the process. In fact, there are liability reasons why I employ a separate management company that is not in house. I don’t want the liability exposure, nor do I want the day-to-day management responsibilities. I’m a dealmaker. That’s my strength. That’s one reason I turn over management to a team of people where that is their strength. VI is more about controlling the process, to improve the end results, not about creating new processes.

2007-9-20 03:27 PM

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