Trade War Is Hiding China’s Big Problems

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The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth.

It happened in Japan in the 1980s. And it’s happening in China nowadays.
The trade war is one of China’s problem that dominates social media these days. It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. And it has crippled the ability of its technology companies to compete in global markets.
But it isn’t China’s only problem. The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends.
One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here.

New Home Prices 2015-19

New Home Prices 2015-19

Koyfin

Unlike the trade war, that’s a long-term problem. Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees.
And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy.
Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s. China experience many more.
Meanwhile, there’s the infrastructure investment bubble at home and abroad, as discussed in a previous piece here. At home infrastructure investments have provided fuel for China’s robust growth. Abroad infrastructure investments have served its ambition to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.

City overpass in the morning

City overpass in the morning

Getty

While some of these projects are well designed to serve the needs of the local community, others serve no need other than the ambitions of local bureaucrats to foster economic growth.
The trouble is that these projects aren’t economically viable. They generate incomes and jobs while they last (multiplier effect), but nothing beyond that—no accelerator effect, as economists would say.
That’s why this sort of growth isn’t sustainable. The former Soviet Union tried that in the 1950s, and it didn’t work. Nigeria tried that in the 1960s ;Japan tried that in the 1990s, and it didn’t work in either of those cases.
That’s why bubbles burst – and leave behind tons of debt.
Which is another of China’s other big problem s.
How much is China’s debt? Officially, it is a small number: 47.60%. Unofficially, it’s hard to figure it out. Because banks are owned by the government, and give loans to government-owned contractors, and the government owned mining operations and steel manufacturers. The government is both the lender and the borrower – one branch of the government lends money to another branch of government, as described in a previous piece here.
But there are some unofficial estimates. Like one from the Institute of International Finance (IIF) last year, which placed China’s debt to GDP at 300%!
Worse, the government’s role as both lender and borrower concentrates rather than disperses credit risks. And that creates the potential of a systemic collapse.
Like the Greek crisis so explicitly demonstrated.
Meanwhile, the dual role of government conflicts and contradicts with a third role — that of a regulator, setting rules for lenders and borrowers. And it complicates creditor bailouts in the case of financial crisis, as the Greek crisis has demonstrated in the current decade.

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I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Source: Trade War Is Hiding China’s Big Problems

How China Could Ruin 2019 For Apple, Tesla, Boeing

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It was 27 years ago when Deng Xiaoping observed that “Saudi Arabia has oil; China has rare earths.”

Talk about a prescient observation. In the early 1990s, China’s then-supreme leader had zero inkling of the iPhones, Tesla cars, drones, robots and high-tech fighter jets yet to come. Yet China’s dominance over these vital inputs is more relevant than ever as the trade war intensifies.

There is a pervasive view that President Xi Jinping’s government has less leverage over Donald Trump’s. Why, then, is Xi the one walking away from a truce? With Trump increasingly desperate for a win, any win, on the global stage, China could get off cheap.

Xi’s team could be misreading the moment. Or putting testosterone ahead of geopolitical peace. A more interesting reading: Beijing reckons it has more cards to play in this game than investors recognized.

In May, Xi made a pointedly-timed visit to a rare earth facility. Though not quite Saudi oil, China’s massive store of elements vital to myriad tech products gives Beijing considerable leverage over Silicon Valley.

It’s but one example of how China may have Trump over a barrel. What other cards are up Xi’s sleeve?

Louis Gave of Gavekal Research just put out one of the more intriguing lists of possibilities. On it: banning rare-earth exports; making life “impossible” for U.S. executives operating in China; devaluing the currency; dumping huge blocks of U.S. Treasury securities; engineering a plunge in global energy prices; sharp drops in orders of goods across the board.

There are a couple of other options. One, dissuading mainland consumers from visiting America. Two, pull a Huawei Technologies on pivotal U.S. companies. This latter step could wreak immediate havoc with the Dow Jones Industrial Average.

Imagine the blow if Xi’s government suddenly closed off Boeing’s access to Asia’s biggest economy. Or if General Motors found its cars parked at Chinese customs. Halting Apple Inc.’s sales would send its own shockwaves through corporate America. Curbing Chinese imports of American soybeans would do the same in agricultural circles.

So far, China has kept retaliatory moves to a minimum. Xi seems to be rolling the dice that Trump will get distracted or impatient and move on to another target—like Japan. His calculation also seems aimed at 2020. Why give away the store to Trump when Americans might elect a less erratic leader?

Weaponizing rate-earths minerals might be Xi’s first real shot across Corporate America’s bow. The U.S. has other sources, of course. If U.S. deposits don’t suffice, companies could turn to Australia, Myanmar, India, Brazil or Thailand. And Trump seems tight enough with Vladimir Putin to score some stock from Russia. But the supply chain disruptions would surely have top CEOs — who tend to be big campaign donors — calling Trump to register their dismay.

It could backfire, too. In 2019, Beijing deprived Tokyo of rare-earth metals and China’s market share has never been the same since. “Unfortunately,” Gave says, “this would give China a ‘feel-good’ boost, but be as productive as landing a mild blow on Mike Tyson’s nose. Such an export ban would undermine China’s long-term production capacity, for the simple reason that rare earths are not that rare.”

The dumping-dollar-debt option could be especially dangerous. Just like an “uncontrolled currency depreciation,” says Michael Hirson of Eurasia Group, selling huge blocks of U.S. Treasuries would “threaten blowback to China’s economy.”

Any surge in bond yields could devastate the American consumer. The shockwaves would quickly zoom from Wall Street to Shanghai. Xi might be hinting at such a move, though, as Beijing buys fewer and fewer Treasuries. At present, China has more than $1.1 trillion of U.S. government securities. Xi seems to think that’s more than enough.

Even so, markets may live in semi-constant fear of a massive bond route bearing Chinese fingerprints. Or any number of ways in which China would ratchet up tensions with Trump and vice versa.

“The path to a potential de-escalating deal is fraught with challenges as both sides dig in, and how markets react will likely help determine the outcome of talks,” say analysts at Fitch Ratings. “Over the longer term, we maintain our long-held view that protectionist trade policy led by the US is likely to persist in the years ahead, marked by cycles of escalation and de-escalation.”

Roughly a week after Xi’s rare-earths pilgrimage, he visited Jiangxi Province, the starting point of Mao Zedong-era 1934-1936 “Long March.” There, Xi called for a new one as Trump’s America does its worst to halt China’s march to the top of the economic rankings.

That hardly sounds like a Chinese leader who’s going to cave to Trump. More like one who’s in this trade battle for the long haul.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China's Jiangxi Province.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China’s Jiangxi Province.

Xinhua/Xie Huanchi

I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”

Source: How China Could Ruin 2019 For Apple, Tesla, Boeing

China Offers Special Breaks To Attract Taiwanese Startups, But Only 1% Find Success

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Hung Hsiu-chu (brown coat), former head of Taiwan’s Nationalist Party, and her delegation visit Vstartup, a startup group, in Beijing in 2016. (Photo: VCG/VCG via Getty Images)

Taiwan’s government says many of the island’s young entrepreneurs are ready to seek their fortunes in China because mainland officials are offering incentives for them to launch their startups in the world’s second-largest economy. China has been reaching out to Taiwan’s investors as part of its efforts to bring self-ruled Taiwan closer to the mainland. China claims sovereignty over the island, where a government opinion survey released in January showed that more than 80% of its citizens prefer autonomy.

But only 1% of the Taiwanese-backed startups in China succeed, according to Taiwan’s Mainland Affairs Council. “They’ve run into some difficulties,” says the council’s spokesman Chiu Chui-cheng. “We’ve reminded our youth to beware of the risks.”

Startups tend to fail due to a lack of savvy about China’s business environment, not the level of incentives, people close to the market say, and they tend to find success by localizing their businesses.

Language fluency, office space, rent breaks and cash

Localizing might come easier to Taiwanese founders compared to peers further afield. They speak China’s official language and get the culture, says Lin Ta-han, CEO of the crowd-funding consultancy Backer-Founder in Taipei.

To help, government agencies in China are said to be offering tax breaks, fast-track permits to set up offices and subsidies for startups in sectors such as healthcare. “For truly small enterprises or for first-time startup founders, these are definitely incentives,” Lin says.

A startup incubator near Shanghai, for example, is offering free office space, subsidized rent for housing and tax breaks, according to a report in the Japan Times. Some entrepreneurs can qualify for up to $31,000 in cash. About 50 other hubs like this one are spread around China. These measures complement 31 broader incentives that China introduced in February 2018 to bring Taiwanese investors and workers over. Those measures cover breaks on taxes and land use. Taiwan’s government responded with its own rack of incentives to keep business people onshore.

More on Forbes: China Now Boasts More Than 800 Million Internet Users And 98% Of Them Are Mobile [Infographic]

Among the more successful Taiwanese-operated startups, MIT Media Lab graduate Edward Shen sold his Taipei-based startup StorySense Computing in 2015 to a firm in Beijing, according to a report from Tech in Asia. His company’s flagship product was a phone number search app called WhatsTheNumber.

Incentives alone won’t be enough to ensure success in China, says Steven Ho, a former Yahoo employee in Taiwan who moved to the mainland in 2012 and started a company that helps new brands enter the market. Internet startups must understand that “there’s the internet and the China internet, two different worlds,” says Ho, 51, and back in Taipei running a company with 400 employees. China’s internet is dominated by local firms and government controls. Startups from anywhere, incentivized or otherwise, need to adapt their businesses to the local conditions rather than continue operating as did at home, he says.

“The absolute number of people in China is big, but that doesn’t correlate to the number of startup successes,” Ho says.

Taiwan government warns of failures

Taiwan’s Mainland Affairs Council reiterates the message by reminding entrepreneurs that the competition in China is “stiff” and some founders may not adapt well to a different set of laws, customs and societal norms there. And perhaps most important of all–a different financial system.

To get paid online in China normally requires a deal with the domestic payment services Alipay or Wechat, which “tend to be stricter on the services that can be sold” compared to overseas peers, says Danny Levinson, past chairman of the American Chamber of Commerce Shanghai’s IT committee.

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KKDay CEO Chen Ming-ming plans to expand his company’s travel services in China after receiving venture capital from an Alibaba fund for Taiwanese entrepreneurs. (Photo courtesy of KKDay)

Courtesy of KKDay

As a news reporter I have covered some of everything since 1988, from my alma mater

Source: China Offers Special Breaks To Attract Taiwanese Startups, But Only 1% Find Success

U.S. Markets Hits 2-Month High: 5 Top-Ranked Growth Picks – Nalak Das

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Following the easing of tensions between the United States and China, U.S. stock markets hit a two-month high on May 21. Notably, President Trump’s imposition of tariffs on Chinese imports and retaliatory tariffs by China aggravated the market volatility which commenced in February.

However, the two rounds of meetings between the two countries’ high level delegates have prevented tensions from escalating. This positive factor along with robust first-quarter 2018 earnings and strong fundamentals of the U.S. economy signal the persistence of uptrend in the market. Consequently, it will be a prudent decision to pick good growth stocks at the moment to enrich your portfolio.

Wall Street Gains Big on Monday

On May 21, the Dow 30, S&P 500 and Nasdaq Composite gained 1.2%, 0.7% and 0.5%, respectively. The blue-chip Dow 30 index gained 298.2 points to close at 25,103.29, its highest since Mar 12. The benchmark index S&P 500 closed at 2,733.01, the index’s highest point in almost nine weeks. Tech-heavy Nasdaq Composite also followed suit closing at 7,394.04. All three major indexes are currently in the green year to date.

Trade War Fears Ease

On March 2018, the United States levied tariffs worth $50 billion on China. Nearly 1,300 Chinese products which were utilized in high-tech sectors bore the brunt of the tariffs. China also retaliated by imposing tariffs worth of $50 billion primarily on U.S. agricultural exports. The Trump administration also gave indications of releasing a list detailing tariffs worth $100 billion on China, fueling fears of a full-fledged trade war.

However, on May 20, the U.S. Treasury Secretary Steven Mnuchin said that the prospect of a trade war was “on hold” following two rounds of meetings between high-level delegations of the two countries. China agreed to buy larger amounts of U.S. goods, especially energy and agricultural products, in order to reduce $375 billion per annum trade surplus with the United States.

Robust Earnings Momentum   

First-quarter earnings results have been exhibiting strong momentum so far. Total earnings are expected to be up 23.9% from the same period last year on 8.5% higher revenues. This is the highest quarterly earnings growth pace in seven years. For full-year 2018, total earnings for the S&P 500 index are expected to be up 19.4% on 5.8% higher revenues. (Read more: Strong Retail Sector Earnings Growth)

A big driver of these positive revisions is obviously the direct impact of the massive $1.5 trillion (including corporate and personal) tax cuts. The full effect of the tax overhaul is yet to appear in the economy as the measures were implemented in January only.

Our Top Picks

Stock markets momentum remained largely unhindered despite recent volatility. Gradual fading out of trade conflicts, steady economic activities and business-friendly policies adopted by the government will pave the way for further stock market growth.

At this stage, investment in stocks with strong growth potential will be lucrative. Our selection is backed by a good Zacks Growth Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the Growth-investing space. We have handpicked five such stocks with a Zacks Rank #1 and Growth Style Score of A.

The chart below shows price performance of our five picks year to date.

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