ON THE MONEY: China isn’t ready to master the universe just yet

By John Grace

Contributing Columnist

One of the questions I am asked is “do you see China becoming the master of the universe?”

Before I share my thoughts, it’s worth knowing my source. Rodney Johnson, president of HS Dent Publishing, is our wellspring in this case. Thanks to taking and passing a test, I became master certified with Dent Research in 1999, where we pay for independent and objective research. 

Most financial advisors primarily depend on companies with products to sell, making it challenging to be ready for what might be on the horizon. With a first-year cost of $10,000, I read everything. Not because I thought they were right, but because I want investors to be better prepared for the good, the bad and the unforeseen hurdles ahead.

Dent Research is an economic research company that uses demographic trends to forecast how our economy might change in the months and years to come. The key word here is demographics, not the archaic 100-year mountain chart, where we study consumers’ buying and selling behavior based on age. 

For example, thanks to the U.S. Census Bureau, we can see that Americans consume the most potato chips by age 14 and parents buy the most potato chips in life when they are, on average, around 41; of course, for their average 14 year olds.

China’s yuan will have a difficult time replacing the U.S. dollar as the supreme reserve currency in the world and it is not likely to happen in the next 20 years, submits Stanford historian Niall Ferguson in a May Business Insider article. This question has come up with Dent Research subscribers and in our chartered members meetings. 

The good news is in the event of a severe downturn like in 2008, the U.S. dollar stood its ground like a nice house in a bad neighborhood. Dent Research asserts that the greenback will maintain its dominance in the next downturn.

“China is staring down a grim set of facts that start and end with demographics,” said Johnson. “The leadership will do almost anything to turn the economic tide.

“I don’t think that China will declare war on the U.S. or even try to take Taiwan by force in the next few years,” Johnson added. “But many things short of war could happen that would cause ripples around the world.”

With unreliable and government-fiddled stock markets, with home buyers often paying upfront for unfinished projects, an astonishing 70% of Chinese wealth is held in real estate, according to Foreign Policy. Land sales remain the main source of income for the same corrupt provincial administrators. 

It’s the Chinese Communist Party that wants to put air back in the property bubble. In the U.S., housing wealth is about one-half of household net worth, according to the Federal Reserve Board.

“If you look at land sales, Chinese real estate is in dire shape,” reports BloombergLast year there was a two trillion yuan ($290 billion) decline in income from land sales that continued in the first 60 days of this year. 

“Given the challenges faced by China’s property market are largely structural, i.e., slower income growth, population aging, we expect the land sales revenue to continue being under stress down the road,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. One of China’s most important components of government revenue is land sales.

In the December Rodney Johnson Report, he explained that youth unemployment stood at 18%, even as manufacturers reported a labor shortage. Now the unemployment rate has been reported to be a record 20.5%, and we are not hearing much about a labor shortage. 

Johnson finds that “China’s economy isn’t on the edge of collapse, but it’s not the rocket ship it has been since the country joined the World Trade Organization around 2000. The Chinese can’t paper over their issues, such as an aging workforce and woefully inadequate social services for retirees, with more growth. But they will try, and that’s where the problems could start.” 

As western nations decline from increased mining and processing, other countries, like China, are happy to take them on. China currently processes the majority of lithium and cobalt for batteries in electric vehicles.

You can expect the Chinese to include mining and processing in the mix. While both are dirty, the Chinese won’t be too concerned with the environmental impact as long as the economics hold up. 

Johnson summarized, “If this comes to pass, it will leave the U.S. and other Western nations more beholden to China, not less.” 

With its first population drop in six decades, according to Reuters, China may not be the world’s most significant power, but it has become a master of political and economic leverage.

John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here for general information only and are not intended to provide specific advice or recommendations for any individual.

LIFTOUT

China’s yuan will have a difficult time replacing the U.S. dollar as the supreme reserve currency in the world.

       
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