9/25/12 – More “Interesting Times” in China

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 25, 2012 10:40:18 AM

and tagged Yesterday's News

Leave a comment

I have discussed two major China themes over the past couple of months: growing cracks in the economy and—quite possibly as a result, to distract the population—growing nationalism and conflict with its neighbors. There have been riots over the second, brought on quite possibly by the first. Now, for the first time, we seem to have riots driven primarily by economic issues— not by the authorities.

The papers have stories on large riots at Hon Hai, a large manufacturer better known as Foxconn, which is a principal supplier for Apple. The Wall Street Journal (WSJ) has “Chinese Factory Erupts” (p. B1), the New York Times (NYT) has “Factory Riot Underscores Rift in China” (p. B1), and the Financial Times (FT) has “Foxconn halts production at Apple supplier after 2000 workers riot” (p. 17).

The articles identify several contributing issues, the most notable being a generational change as the population ages. Where the older workers were glad to have a job, the younger workers have higher expectations and are more easily dissatisfied. Note that this trend will only get worse going forward. They also point out that demographic shifts have forced factories to move inland to find cheap labor, which can result in existing workers being moved. Finally, the weakness of the world economy has placed limits on firms’ abilities to provide greater pay and benefits, even as expectations are rising.

This growing gap is highlighted in the WSJ’s “Chinese Profit Margins Fall to the Factory Floor” (p. C10). The export-oriented low-tech manufacturing model that has generated Chinese growth so far is hitting its limits, as growing competition and rising costs are pushing margins close to zero. Unless there is a strong recovery in Europe and the U.S., this will probably not change. The growing economic stresses are also stretching the Chinese political system, which does not have mechanisms built in to allow change. The FT has a good article, “Wang and Gu trials dash hopes for legal reform” (p. 4), that outlines some of the challenges.

The fact that these riots are happening in one of the most visible and Western-facing Chinese businesses suggests to me that there are other problems brewing as well. We certainly live in interesting times.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®