Posted on 12/14/2010 12:27:45 PM PST by unclebankster
BUSINESS in China is about three things: volume, volume and volume. Or so many analysts believe. So as the revenues of Chinese companies soar, rosy forecasts abound. Goldman Sachs, an investment bank, predicts that the prices of the shares of Chinese companies trading in Hong Kong will shoot up by 30% next year. Nomura, another bank, says they will rise by more than 20%.
Besides heady revenue growth, China bulls cite two reasons for optimism. Chinese firms are cheaper than they have been in the past and cheaper than similar companies in other parts of the world. Also, Chinese shares did badly this year. A catch-up is imminent, say the bulls.
Are they right? Another possibility is that Chinese stocks are cheap because the market has spotted some serious underlying problems. Here’s one: as revenues soar, profit margins are falling . Sales rose by a staggering 42% year-on-year in the first half of 2010. That was partly because the first half of 2009 was dreadful, but sales will still rise by an impressive 23% in the second half of 2010, predicts Macquarie Securities, a broker. Yet margins have been on a protracted slide that shows no sign of stabilising, says Michael Kurtz, Macquarie’s Asia strategist. Normally they rise by 1.5% in the first half of the year because of seasonal factors, but that did not happen in 2010.
In some industries conditions are horrible. Exporters’ margins are often less than 2%, if China’s minister of commerce is to be believed. Firms in the southern Chinese manufacturing belt are being painfully squeezed. A shoe exporter who recently returned after a long absence found his old Taiwanese suppliers had all left, having been crushed by rising costs. In their place were tough locals who demanded the full price for their products regardless of glitches. The shoe exporter has been threatened, and is thinking of hiring a bodyguard. His tale is far from unique.
The Chinese government is phasing out subsidies to industry and relaxing energy-price controls. Workers are demanding higher salaries. Environmental standards, too, are being tightened. All these trends hurt profits, yet the government is happy for them to continue. “This is a self-inflicted margin-reduction,” Mr Kurtz says.
The government wants to allow ordinary people to enjoy more of the fruits of growth. Happy citizens are less likely to riot or demand the right to vote, it assumes. How far it will go remains to be seen, however. Will it allow the (artificially low) interest rates that banks pay depositors to rise? That would reduce the transfer of wealth from savers to well-connected corporations, which enjoy cheap credit. Will it allow the yuan to appreciate, thus walloping exporters but boosting consumers’ spending power? As usual in China, no one knows.
Why are Chinese workers trying to screw up our business model?
Asian worker bees need to work cheaper,harder,and dumber.The nerve of these guys to start making demands during unsettling economic conditions.
I hear they are the economic wave of the future.
That's because there's no word for "quality" in the Chinese language.
“That’s because there’s no word for “quality” in the Chinese language.”
IMO the Chinese do have quality products but they are trying to do too much.No country in the world can manufacture everything at high end quality.
Business in China is about three things: volume, volume and volume.
That’s because there’s no word for “quality” in the Chinese language - fullchroma
LOL...and so true. Only the most fervent Commie Free Trader is still spinning Free Trade with Communist China. Communist Chinese products are mostly crap....they have to do things “volume, volume, volume”
Not only the Communist Chinese will have to deal with higher wages...they have a shrinking population due to their “All Children Except One Left Behind” policy. In about 10-15 years Communist China is not going to be the El Cheapo warehouse anymore.
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