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Is China's Economic Boom Over

Economics / China Economy Oct 30, 2012 - 12:21 PM GMT

By: InvestmentContrarian

Economics

Sasha Cekerevac writes: The strength of the Chinese economy over the past two decades has been nothing short of amazing. Because of this Chinese boom, we’ve seen one nation’s large consumption have a heavy impact on global commodity prices. The Chinese economy also has been a large driving force for lowering inflation levels for Western nations. As Western countries like America import cheaper products, the average consumer can buy a lot more goods for the same price.


However, things are certainly changing. The Chinese boom is still growing, but at a decelerated rate. Higher labor costs are one issue; another issue consists of the higher input prices for the commodities that feed the Chinese economy, resulting in higher costs to the final consumer.

What is shocking is the level of corruption and tax evasion within that nation over the past decade. A recent report by Global Financial Integrity stated that $3.8 trillion was smuggled out of China over the past decade. That is a truly massive amount. In 2000, approximately $204 billion was smuggled out of China; in 2011, that number was $472 billion, or 8.3% gross domestic product (GDP). (Source: “Dirty money cost China $3.8 trillion 2000–2011: report,” Reuters, October 25, 2012.)

This amount comes from tax evasion, corruption, or criminal enterprises. While the Chinese economy is growing, it’s still in its infancy. The Chinese boom needs to be nurtured with additional funding and reinvestment. If Chinese nationals are evading taxes and pulling money out of that nation, this certainly isn’t positive for the Chinese economy over the long term.

This also skews many markets around the world. If people are pulling money out of China due to tax evasion, they’re not interested in the rate of return, but are mainly interested in capital safety. This is why, I believe, at least partially, we’ve seen investments around the world by Chinese nationals. Once they get money out of the Chinese economy, they need to place it somewhere. While some money can be funneled back into China in complicated and convoluted methods, part of these funds might be invested in real estate, gold, and art.

The recent Chinese authorities are starting to crack down on corruption and tax evasion. Ultimately, for the Chinese economy to grow, corruption needs to decline. The Chinese boom is certainly not over, as it will take many decades for the GDP per capita to rise substantially and reach Western standards.

One positive of this cleanup in corruption and bribery would be greater transparency of businesses within that nation. As the Chinese economy continues to develop, many companies are poised for growth, but foreign investors are hesitant due to questionable accounting practices.

If the authorities are able to reassure investors that companies are operating legitimately, this will help the Chinese economy continue to grow. I think they will crack down hard on this flow of illegal funds out of the country. With hundreds of millions of people still left to move up from poverty into the middle class, the Chinese boom should continue for many decades. The question: can the Chinese leaders develop a level of integrity that foreign investors might trust? Time will tell.

Source: http://www.investmentcontrarians.com/recession/chinese-economy-is-the-boom-over/921/

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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