Peasants

To farmers, agriculture is a business; for peasants, it is a way of life.   For the last thirty years, Chinese peasants have migrated to coastal cities in search of better pay, working as migrant workers at construction sites and factories.  They bring with them blankets and stoves as they live in the building that is going up!   Some 68,000 factories were closed down in the wake of the Great Recession of 2008 causing layoffs in the millions.

Meanwhile, farms in the hinterland were converting to cash crops for exports instead of growing staples like rice and wheat.  One such crop is mandarin orange in Hunan.  This turns out to be a double whammy!  Price is uncertain for the mandarin orange crop.  IN 2009. a small cosmetic issue with the crop caused consumers to stop buying in the markets.  Meanwhile the merchants bid down the price some 80% as the fresh market became glutted.  At the same time, prices for wheat and rice are rising rapidly, hence the recent monetary tightening to contain inflation so that the peasants are not radicalized.

Interesting Dynamics in Chinese Real Estate

Fifteen years ago, a friend of mine asked me to help him invest in some toilet business as the building boom was coming in China.  At the time, he sold half of his Discovery Bay real estate development in Hong Kong.  It certainly did, and may have over shot by a mile!

A few weeks ago, I was traveling in Qingdao (of Tsingtao Beer fame) and noted massive apartment houses coming up on both sides of the highway to the airport.  According to the driver, most of the new buildings downtown and in the outlying areas were dark at night.   Meanwhile, he wants a better place for his family but could not afford the ones now empty.   I saw a similar situation in Chengdu, Xian and Shanghai in 2009.

The speculation frenzy is not unlike the U.S. real estate boom before 2001 to 2007 that ended badly.   Over the radio was recording of a conversation between a loan broker and a loan applicant.  For $1,000, the broker guaranteed the applicant a loan as he has friends in the bank.   Meanwhile, local governments depend on money from land leases, and developers were getting bank financing to build houses not many could afford.

US$1 hit RMB6.50 today

This means the export-led model of the last 30 years is changing.  Growth in the next 30 years will probably be IP and brand-driven.

The export model is no longer viable: labor and fuel costs are prohibitive and the land is polluted.  Labor cost increased some 30% to 100% in 2010 on top of currency exchange increase.  Harvesting and canning mandarin orange in Hunan, trucking the cans to Shanghai, crossing the Pacific Ocean to Long Beach and then on to a freight train to Walmart depots across the country no longer make sense.

China has >$3 trillion in foreign currency reserve, and counting.  The money has to come back to the U.S. sometime.  Unlike the Japanese in 1980s, they will not be buying trophies:  Pebble Beach, Rockefeller Center, Hawaiian Hotels… Instead the Chinese will be looking to extend their manufacturing and supply chain base to reach consumers directly.  This means buying Western brands.