Over the last few decades China has pushed toward superpower stardom both militarily as well as economically. The rest of the world was complicit in cheering and financially supporting China as they moved forward. However, this support may have been a mistake as recent statistics have demonstrated.
China was on a torrid pace regarding international investment and the exportation of goods and now all this is plunging downward. Eventually this negative event will filter through the world markets causing a decline in the value of financial assets around the world. Since this is a website dedicated to gold and precious metals we will continue to sound the bell regarding the need for individuals to invest in gold and precious metals to protect their wealth against events like this.
Historically gold has proven to be the best hedge against economic disruptions and collapses than any other asset class in the world. As we continue with this post keep in mind the value of having a gold IRA or precious metals IRA.
The Chinese Government Is Proving to Be Its Own Worst Enemy
China’s greatest challenge for continued economic success and global expansion of its economy, exports and investments is its intrusive government. It’s not Germany, its exporting rival, it’s not the WTO’s, World Trade Organization, arbitration of trade disputes in favor of other countries and it is not the possibility of the United States proposed protectionist policies. It is the erratic and consistent intrusive meddling from its own government in the affairs of private business..
This intrusive meddling has finally caused foreign multinational corporations to pause for a moment and reconsider their options. A recent example of this trend has to do with Anbang Insurance Co. Ltd. This Chinese firm was successfully making one foreign acquisition after another. If you were looking for a premier symbol of China’s rising global economic prestige and a company that represented its worldwide ambitions then Anbang Insurance would have been the chosen one.
In light of all this success the Chinese government, just last week, has increased the pressure on this giant of the insurance industry to not only cease its future acquisition efforts, but also the government is pressuring the company to start divesting itself of these hard-earned foreign assets as quickly as possible.
The pressure being applied to Angang Insurance is not isolated. It appears that this will be the norm for Chinese firms abroad and for China’s economic prospects and future policies. China’s rise as an economic superpower has not only hit a wall, but it has simply stalled out rather badly. This is evident when one views any objective statistical measure or quantifiable category. More distressing to Chinese businesses is that it’s not a growing national debt or economic problems to blame, but it’s the companies’ own government which is the problem. As the Chinese government continues to meddle Chinese President Xi Jinping continues to reinforce the image of China as a world-leading proponent of trade, globalization, and even economic progress though statistics show otherwise.
The average person in the West still views China as overrunning the world with its pervasive exporting whose products range from steel to sneakers to mobile phones. However, the reality is that their exports have petered out. Let’s look at the following statistics.
The value of merchandise from Chinese exports roughly doubled from 2006 to 2011. While most countries were reeling from the impact of the Global Financial Collapse and Great Recession, China felt very little affect. Then in the years since 2011 per the data from the World Trade Organization, their total value of exported merchandise has only grown by 11%.
In conjunction with its exports, the Chinese currency is experiencing similar swings. The Chinese Yuan cracked the world’s top five most heavily utilized currencies for payments of goods by the end of 2014. At its peak, they comprised about 2.2% global share.
It appeared that China would finally attain its ambition to become a real rival of the U.S. dollar’s premier position. Yet today, that forward progress has since reversed. This past June, the Yuan fell to only 2% of that payment share, putting the currency behind that of the Canadian dollar.
To see how this trend is continuing consider China’s capital markets. The government has opened up stock and bond markets slightly to foreign investors. However, investors still to choose to make their purchases of ADR versions of Chinese companies from New York or Hong Kong over the actual shares that are traded on Shenzhen or Shanghai.
China’s Loss of Competitiveness Threatens World Economies
Part of China’s economic obstacles were inevitable. China was the king of low-cost goods. However, every country that makes that transition to an economic power loses that low-cost advantage. The transition to developed nation from a developing economy has been the ruin of many a country because the conversion is very difficult to manage. China is also feeling intense competition from countries like Vietnam and its arch-rival India. Their wages are significantly lower therefore China is losing its edge in the exports of textiles and apparel goods to the U.S., its favorite overseas market.
Exasperating the problem, the Chinese are not managing to substitute these exports with higher-valued and more important ones at nearly the rate that they need to. In 2014, China exported 910,000 vehicles overseas. But in 2016, the Chinese only exported 708,000 commercial and consumer vehicles.
Chinese Government Meddling Making Things Much Worse
You would think that the Chinese government would be making policies that would allow its companies to meet these economic challenges, but it appears they seem satisfied to remain part of the problem. The Chinese are effectively becoming their own worst enemy. Official policies coming down from the government only hinder the markets and stifle private enterprise rather than helping them. The only reason that the Chinese Yuan has any relevancy on both the world currency and Forex markets is due to the Chinese government’s tinkering whenever it suits their interest. However, this has caused the Yuan to be more of a side show than main attraction. In May of this year, the Chinese government exerted even more control over the currency rather than liberalizing it, thus reversing a long-stated and long-held policy.
Investors have long memories, as they remember how in 2015, the Chinese government used a heavy hand in attempting to stop the stock market collapse that was underway. Investors left with not so fond memories and with a bad taste in their mouth for carrying exposure to Chinese market-traded stocks.
Governmental interference is best demonstrated in the overseas direct foreign investment which Chinese companies attempted to pursue freely. Government officials applauded as their major firms bought overseas assets and companies. This led to impressive and massive acquisitions from companies like Anbang. However, it also caused a debt-crazed buying spree of foreign assets.
The government caused the problem by giving companies a free hand then compounded the problem by abruptly changing their policies with tough restrictions on foreign deals. Syngenta AG was acquired by the state-owned company China National Chemical Corporation adding to China’s offshore investments which grew by an impressive 9%. However, remove this one massive deal from the statistics and their foreign investments would have declined by one-third.
Chinese Government Simply Can’t Leave the Markets Alone
Micromanaging is an ancient cultural tradition that is being applied on an economic level that is hampering the Chinese economy. This is the ultimate cause of their global economic decline and slowdown. This micromanaging takes the form of parceling out finance to the politically well-connected. Rather than helping the most competitive companies and entrepreneurs the well-connected are receiving that all important capital.
The further they decline the more intrusive the government becomes. They continue to become a greater impediment to growth with too much interference. Their latest concoction is the “Made in China 2025.” This is their version of a subsidy-heavy industrial policy. They also have an ambitious Belt and Road Initiative which is intended to build the necessary infrastructure to carry a hopeful and expected boom in exports throughout Central Asia, Europe and the Middle East. It is thought that this initiative is probably doomed to fail.
A lesson Chinese officials need to learn is the past history of countries who went through similar states of economic development centuries ago. Two prime examples would be the British Empire in the 1700s and the United States in the 1800s.
Chinese domestic giants and multinationals are both going to struggle as they make this difficult transition into becoming international giants. The change requires financial savvy and expertise, technological innovation, branding and experienced management in order to truly compete, not more government intervention.
What this means to global markets is that they can no longer depend upon a limitless flow of capital from China through their acquisition of foreign companies. Furthermore, no longer can they depend on the Chinese bidding up foreign assets as well as driving up the price of natural assets and gold. This could be the catalyst that starts the overdue correction in the financial markets. Furthermore, this demonstrates why one should seriously view gold as a hedge against this correction which will lower the value of paper-based securities.
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