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Chinese Growth and Social Stability

China has what the ruling Communist Party calls managed capitalism. You may be considering either direct investment in China or purchase of Chinese stocks as ADRs on US exchanges. When the state has such a strong hand in the economy, fundamental analysis requires that you understand the basic goals of the rulers of the country. The people of any nation support the government when times are good, when there is a valid external threat, and when they are controlled by fear. Increasingly, Chinese rulers are dependent on high employment to keep their people happy. This is a nation that has experienced double digit growth for decades and is not cooling off. China has had a one couple one child policy that has reduced its growth rate and resulted in an aging population. As the Chinese economy has thrived wages have risen and China has lost some of its competitiveness. The worst recession in three quarters of a century has reduced demand for Chinese products from Europe and North America. Now Chinese leaders are aiming for a lower but still sustainable growth rate and the Chinese GDP is falling at about .3% per quarter. This discussion has to do with Chinese growth and social stability as it relates to investment in China.

The Connection between an Information Society and Economic Success

China is a great example of how electronic communications have helped economic success. Supply chains begin in China and stretch across the world. Retailers in North America computerize their re-ordering. Every purchase at Target or Wal-Mart goes to a satellite and down to headquarters. When the computer software decides that it is time to order more or an item the information goes to the factory in China in seconds. Much of China’s economic success has come from entering the electronic information age. However, Chinese growth and social stability are also linked to electronic communications and fast access to information.

The Connection between and Information Society and Social Unrest

We have just seen street demonstrations lead to the overthrow of the second government in just two years in Egypt. Much of the information that led to civil unrest came from internet telecommunications. The same internet backbone that helps industry keep up in the modern world puts governments a risk. While many in Egypt were unhappy with an increasingly Islamic government many were simply unhappy that the most recent government was not generating more jobs. Now think of Chinese growth and social unrest. The Chinese have come to expect as steadily expanding economy and relatively high employment. An underlying concern for a one party government is to keep people sufficiently happy that they will not start looking for an alternative. In the case of China it would not be a matter of the Republicans throwing out the Democrats but rather a more substantial change in who governs and how.

Investing in the Face of Decreased Chinese Growth and Social stability or Instability

What is reasonable investment advice regarding slower growth in China? It is unlikely that Chinese rulers will let things slide so badly that they risk a government overthrow. They need to deal with an overbuilt high end real estate sector and a raft of unsupported loans. The government is driving interest rates up and intentionally slowing the economy. They are also hoping to stimulate local small businesses as well as home based consumption. This is probably not the time for large investments in China but it may well be time to look at what businesses in China or doing business with China provide infrastructure support to the small business sector.

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