The Chinese Economy Will Turn Around

The Chinese economy has had an incredibly difficult year. Between the dramatic sell-off in the Shanghai stock exchange and their weakening GDP numbers, it has just been a constant flow of bad news from China. There has also been some negative statistics that are fueling concerns that China’s legendary success of pushing over 300 million people out of poverty over the last 30 years is coming to an end.

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Besides economic troubles, China has also been facing pollution and other environmental challenges. A World Bank Study actually states that only 1 percent of China’s 560 million city dwellers breathe safe air. There is also a looming property bubble and the fact that their country de-prioritizes democratic principles, but let’s keep the focus of this to economics.

By some estimates, China’s GDP growth rates are hovering below the minimum 7 percent per annum that is required to double per capital incomes in one generation. However, there are factors that suggest a rebound is about to occur. Public policymakers are planning to further cut interest rates, encourage bank lending by reducing the reserve requirement and increase public investment.

China is managing the three main drivers of growth – capital, labor and productivity in a way that supports long-term prospects. The relaxing of the one child policy back in October was quite a surprise. It was originally introduced in 1979 to slow the population growth rate – it is estimated to have prevented around 400 million births. Now, 90 million couples are eligible to have two children.

The country also has plans to increase the number of cities with a population of 1 million from around 10 today to 221, as well as the cities with 10 million people from 5 to 8 by 2025. A more urban population is the key piece of their strategy to move from an investment led, export based economy toward a consumption based urbanized growth. This will help the Chinese avoid a middle-income trap.

A lot is at stake. Over the past few decades, China has become a major and main trading partner and source of foreign direct investment for developed and developing countries. They are the largest foreign lender to the U.S. government and the biggest source of foreign direct investment to Australia, as well as the largest trading partner and source of infrastructure for emerging countries such as Brazil and South Africa.

Needless to say, China has an enormous vested interest in avoiding an economic slump.

3 Reasons Why You Should Invest In Africa

“We are enjoying in Africa what I call the democracy dividend. The progress we are seeing, economic development are all part of the dividend of good governance, respect for human rights, rule of law. It has created an enabling environment that allows not only foreigners to come in and invest but for Ghanaians to invest. It has created an atmosphere for our young people to be creative, innovative…” – President John Mahama, Ghana

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China used to be where the big money was – low cost workers and huge factories were plentiful. Now, with the Chinese downturn there are new reconsiderations for future investments. One of them is the prospect of Africa. If you have not seen all of the signals that this is the new continent to invest in, here they are.

  1. Africa is growing fast

The World Bank released a report that 6 of the 12 fastest growing countries in the entire world are located in Sub-Saharan Africa. Half of the world’s population growth will be in Africa.

Africa has sure had its fair share of problems from physical geography (landlocked countries will disease-susceptible tropical climates) to manmade challenges such as corruption. However, when you view Africa as a long-term investment, the combination of demography and development make Africa a promising buy.

  1. China is already in Africa

For the past decade, China’s investments in infrastructure like mines, farms, roads, ports and railways have been the big story. However, they have also invested in energy to increase Africa’s raw materials like food, oil, diamonds and uranium.

Now, Africa is both a partner and rival to Chinese manufacturing of clothes, toys and electronics. Yes, right now Africans have to wait and see how much they will be affected by China’s economic slowdown. Most of the attention is focused on low commodity prices and possibly damaging capital flight.

  1. Western countries are absent

In ways of both governmental aid and private investment, the United States and European countries have been pretty minimal. Right now, western governments are cash strapped and have turned from public sector aid to more private sector investment as their global developmental strategy. However, this has not been working out well because the private sector is often deterred by the high risks involved in investing in Africa.

So, when you put these three factors altogether, it does look like the perfect time for American businesses to consider Africa for long-term growth possibilities. In the next 100 years, the consuming middle class African will be a huge driver of economic activity.

In major cities in big countries, the middle class demand is already very real. With better infrastructure, more efficiency, less corruption and more urbanization, investing in Africa will become the new source of wealth.

In Today’s Economy, What is Corporate America Doing With All This Cash?

According to a FactSet analysis of S&P 500 companies, the collective total of cash reserves in corporate vaults for US nonfinancial companies reached a historic high $1.4 trillion during the fourth quarter. This total is nearly double its value from 2006, which was an estimated $820 billion. Quite naturally when you hear these figures, it would seem fair in asking what these companies are doing with so much cash in reserves.

Many would think it makes sense that these companies should give the economy a boost, right? Go on an economical spending spree so to speak. But not so fast. While it may seem like the most logical answer would be to take the funds and attempt to distribute them as far as they might reach, it’s not that simple. Corporate America faces a few dilemmas with these large cash totals. While of course they would like to kickstart job creation and invest in major projects for the future, the courage to spend isn’t there, but more importantly neither is the ability.

Source: Moody's

Source: Moody’s

One reality is that the cash reserves isn’t all money amassed from profits earned by the corporations. Quite a bit is money that has been borrowed. Alongside the $1.4 trillion in reserves, is a whopping $4.8 trillion in debt. Over the course of approximately six months, companies increased their cash reserves by more than $30 billion. However, during the 12 months that followed this increase in reserves, these same companies increased their debt by more than $201 billion. According to an interview with Richard Lane, senior vice president at Moody’s, “… companies increased their debt by a factor of six relative to cash growth.” Another important reality is where these reserves are located and the impact of movement. An estimated 60 percent of the cash reserves is located outside of the US and bringing it back over would mean being subject to as much as a 35 percent tax. This action alone would decrease their total reserves by nearly one-third.

The bigger picture is what the American corporations need to do with their cash reserves, but essentially aren’t going to be able to do. At least not to the extent they would prefer. They would like to increase their spending, create new jobs, invest in research and massive infrastructure updates. These are the actions that would spur growth and generate earnings, increasing their odds of reaching financial goals and most importantly keeping both their shareholders and stakeholders happy. Unfortunately, what’s most likely to occur is the cash reserves will be applied to the debt owed and odds are high that more money will be needed to pay towards the debts, leaving the American economy to foot the remaining bill.

Enough Oil to Make a Country Completely Self-Reliant

The price for oil has fallen at a somewhat rapid pace over the past seven months, causing the Energy sector to take quite a hit in revenue. That said, there is no denying the multitude of benefits to both consumers and many businesses. Consumers are able to save more money. Businesses are experiencing lower energy costs and realizing an increase in their profits, thus paving the way for governments to benefit from more taxes being paid. This also could open the floor up to M&A opportunities for some companies.

There is no denying that the underlying cause in the declining prices is partly due to the struggling economic growth, which in turn reduces the demand. But the other obvious factor is self-production and that’s what has benefited the US.  For nearly four years, oil prices around the world have held at about $110 a barrel. Both Brent and US crude oil have fallen below $50 a barrel which is a first since May 2009. The supply from America is up roughly four million barrels a day, since 2009. This increased supply, coupled with banned crude exports and plummeted American imports, has contributed to an overwhelming glut on world markets.

The interesting side of it is that many exporting countries have decided against curbing their production, as a means to keep prices high. Many would argue, however, that this might not be such a wise move. The increased American supply is no doubt largely attributed to innovative techniques for fracking and drilling. Shale production methods that are flexible undoubtedly make it easily responsive to price changes. All this coming together would indicate continuous gains in productivity, with no definitive end in sight.

Crude Oil - Barrel price. Reuters

Crude Oil – Barrel price. Reuters

Though major exporters have remained steadfast on their refusal to cut supplies, the International Energy Agency (IEA) monthly report says continued US production and falling prices could finally force their hand. “On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however,” the report said. “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”

The real question remains to be can the US become self-sufficient in the midst of the oil debate? Though a simple question, the answer isn’t quite as easy. Yes, the US is testing their oil storage capacities to the limit. Yes, there is a clear line of connection between the falling prices and the boost in the economy. But the reality is that the trend of increased daily barrel production would have to continue for the next decade for the US to become energy self-sufficient. Though a very ideal situation, it might be fair to say that the optimism far outweighs the reality.

Pollution in China is More Than a Public Health Threat

In March 2013, Premier Li Keqiang declared “war on pollution” but one year later, 90% of China’s biggest cities still fail to meet air quality standards. Granted that this still an improvement over last year, but it’s clear that they have a very long way to go before air quality in areas like Shanghai and Beijing become safe places to live and work. The pollution isn’t just a problem for public health reasons, but also its economic health.

In order to protect its ailing citizens and decrease the amount of pollution in the air, state regulators have been ordering the closure of most “offending enterprises”, according to The Economist. Combined with the economic slowdown in China, those who have been laid off due to these closures have a difficult time finding new jobs to support their families. Foreign companies that operate within China are also having difficulty recruiting senior executives from abroad because of the failing air quality. Most companies have had to offer a “hardship bonus” to those they hire as compensation for living in these conditions.

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Let’s pause for a moment and take a look at what exactly the air quality is like and how it’s measured. The Air Quality Index (AQI) is measured based on the presence and levels of particulates, sulfur dioxide, carbon monoxide, and nitrogen dioxide in the air (to name a few). This could range anywhere between 0 and 500. The World Health Organization considers an AQI of 25 to be considered safe. But for many urban areas in China, the AQI could be anywhere between 100 and 500; sometimes more. Exposure to such levels after extended periods of time are known to cause both cardiovascular and respiratory diseases. In fact, it’s been shown to decrease life expectancy by 5.5 years.

According to an MIT study, published in the journal Global Environmental Change, there was an estimated $112 Billion lost in 2005 due to “lost labor and an increased need for health care.” The long-term effect on the health of China’s citizens puts a strain on the economy that cannot be undone overnight. The “war on pollution” is not a war that will be over anytime soon. But with determination and (most importantly) cooperation it’s a battle than can be won. We can hope that in time, improved conditions in China’s urban landscape will lead to additional economic growth.