A Dwindling Chinese Workforce’s Impact on the Global Economy

China’s role as a low-cost producer has benefited the standard of living of its own population as well as the global economy. This status suppressed inflation, not only in China but also worldwide, including in the United States and Europe. Beneficiaries included U.S. consumers, who were able to purchase $9 polo shirts at WalMart and low-cost consumer electronics including cell phones and computers. This has begun to change. China’s role as the world’s low-cost producer has started to end, and will all but disappear over the next three to free decades. 

China’s rise to become the world’s second-largest economy relied largely on a tremendous increase in the country’s working-age population. From 1980 through 2015, China’s working age population increased by 380 million, an amount greater than that of the entire U.S.  population. Over this time period, In what was the largest migration in human history, hundreds of millions of rural Chinese moved to cities for manufacturing jobs, and to improve their existence as rural peasants.  

From the early 1980s through 2007, western manufacturers who had been automating their operations to decrease labor costs generally stopped. Instead, many moved their manufacturing operations to China. Technology and automation couldn’t compete with the low cost of Chinese labor, which up until 2002 approximated 60 cents per hour. In  2007, benefiting from its role as the workshop of the world, China’s exports exceeded those of the U.S. for the time. China became the world’s largest exporter and began to be referred to as the workshop of the world.

China now has a different problem. The country’s working-age population has peaked. What was referred to as a demographic dividend is now turning into a demographic time bomb. United Nations’ estimates indicate that by mid-century, 2050, China’s working-age population will have declined by 212 million. This decline will be equal to the entire population of the world’s fifth most-populous nation, Brazil.

China’s advantages as a low-cost producer are ending.  Over the past decade, wages and benefits have risen by double-digits as workers demand higher compensation. While the slowdown in China’s growth has reduced its labor shortage, the pressure on wages will increase in the coming decades as the number of workers continues to plunge.  

When energy costs are also taken into consideration, manufacturing in China is now a more expensive place to manufacture than India, Indonesia, Mexico, and Thailand.  

In late October, in a move that could best be described as “too little, too late, China announced that it was abolishing its decades-old policy restricting most families to one child. This will not have any short-term impact on China’s dwindling workforce, nor will it have any long-term benefit. Because of the decades of China’s one-child policy and the costs of rearing children, most Chinese couples still only want one child. For those couples who decide to have a second child, it will be 16 years before the country benefits from any additional workers entering the job market.

Adding to the growing shortage of workers, many Chinese factory workers are now returning  to their home villages to care for their parents. This will increase as the number of Chinese older than 60 is double to over 46 percent over the next 35 years.

Efforts by Chinese manufacturers to move labor-intensive, low-technology manufacturing to countries in Africa, Vietnam and elsewhere in Southeast Asia generally have not been successful due to cultural issues and generally low productivity. Trying to alleviate the labor shortage, China’s manufacturers have been automating at a rapid pace and sought to manufacture higher-margin and more value-added products.

The impact on western consumers will be significant. It’s not a pretty picture. The cost of manufactured products will rise significantly. It will have an impact on inflation. The increased costs for western consumers of manufactured products will result in an overall reduction in the western standard of living.

Author: Jeffrey Friedland (jeffrey@friedlandcapital.com)

South Korea To Be The First Country to Issue a Chinese Renminbi-Based Bond

South Korea will become the world’s first nation to issue renminbi-based “Panda” bonds when it proceeds with a China bond sale next week. Panda bonds are bonds issued in China, compared to Dim Sum bonds, which are also denominated in renminbi, but are issued outside of the country. Korean officials will be in Beijing and Shanghai next week to start pitching $468 million of Renminbi-based bonds.

The Korean bond issuance is indicative of Beijing’s desire to internationalize the country’s currency.

This move by Korea is the next step of Beijing’s expansion of access to its domestic bond market by foreign institutions and central banks. The internationalization of the renminbi was part of a strategy by China to achieve reserve currency status for its currency, which was granted by the International Monetary Fund last month.

In 2014, as part of the internationalization of the renminbi, the United Kingdom became the first foreign country to issue debt denominated in China’s currency with the issuance of RMB4 billion of bonds in London. Russia also intends to raise US$1 billion in renminbi-denominated debt, with an offering anticipated to take place in Moscow next year.

Chinese bond markets are already the world’s third largest after the United States and Japan, with over $6 trillion of bonds outstanding.

Author: Jeffrey Friedland

New BRICs Development Bank Launches in Shanghai

Yesterday was the official ceremony for the launching of the New Development Bank in Shanghai. Representatives from the five shareholders, Brazil, Russia, India, China and South Africa were in attendance. They collectively envisioned a more responsive and less bureaucratic alternative to existing global institutions including the Asian Development Bank and the World Bank.

The launch of the New Development Bank comes about a month after the China-led Asia Infrastructure Development Bank was also launched.

Both new institutions have similar objectives, creating global investment institutions in which developing countries have more influence than they do at existing global financial institutions. Both will start with the same capital, $100 billion.

While the Asian Infrastructure Development Bank will be limited to projects in Asia, the New Development Bank will not be limited to Asia.

Without South Africa, the other four BRIC countries who formed the New Development Bank represent more than 25 percent of the world’s gross domestic product and 40 percent of the world’s population.

To a large extent, the formation of both new financial development institutions was driven by the exclusion of the BRIC countries from influence at both the World Bank and the Asian Development Bank.

While the startup of any institution is challenging, I do have concerns regarding the long-term viability of the New Development Bank. The New Development Bank’s voting membership is equally shared between Brazil, Russia, India, China and South Africa. I have concluded that the potential for geopolitical tensions between the countries and each of the country’s own political and economic objectives could pose an issue.

The fact that the New Development Bank will be based in Shanghai is indicative of China’s desire to dominate the New Development Bank for its own global objectives.

The formation of both of these new institutions should be a wake up call to both the World Bank and the Asian Development to be more inclusive, or face increasing irrelevancy.

Author: Jeffrey Friedland

Jeffrey@friedlandcapital.com

Is China Once Again “Cooking its Books” on GDP Growth?

The Chinese government established a growth target for this year of “around 7%.”  For the second consecutive quarter, China exactly hit that growth target.  If it had been 6.9% or 7.1% it may have been more believable, but exactly 7% for two consecutive quarters? It’s just not credible. Is this another case of China “cooking its books?”

While it’s been suggested that “smoothing data” is OK, fabricating data is not acceptable. I’ve concluded that China’s economic bureaucracy, its National Bureau of Statistics, is afraid of backlash from President Xi Jinping if the 7% growth targets aren’t achieved. Therefore, I believe the growth targets are achieved!

China has a history of fabricating growth numbers.  Li Keqiang, now the country’s premier, once stated that the country’s GDP data was “man-made and therefore unreliable.”

Overall, China’s economy is weak. Some underlying data causes one to question the GDP growth rate, including the weakness in China’s industrial sector.  Industrial production, critical for the country’s, growth grew 6.3% year-over-year in the first half of this year.

Two other traditional drivers of growth also are significant. Growth in investment in fixed assets decreased from 13.5% to 11.4%. Retail sales, increasingly important, decreased from 10.4% from 10.6%.

Adding to the lack of credence in China’s growth rate,  global demand continues to be weak. Investment in infrastructure, a consistent driver of growth has been weak as local governments battle their own debt. Most importantly, much of China’s economy has not responded to four cuts in interest rates and adjustments in bank reserves since late last year.

Citibank has stated that it believes that China’s growth rate is closer to 5%. But even if Citibank’s growth rate is more credible, looking at China’s economy compared to the U.S. or Europe provides a different and more positive perspective.

The U.S. economy shrank .7% in the first quarter of this year.  The combined GDP of the 19 eurozone countries was .4% higher in the first quarter than in the last quarter of 2014.  Compared to the U.S. or Europe’s growth rate, even if China’s economy only grew 5% during the first half of this year, China’s growth rate is phenomenal.

Author: Jeffrey O. Friedland

jeffrey@friedlandcapital.com

Cuba: Dangers for Investors in an Economy Run by Revolutionaries

It was a historical photo op in Panama when Raul Castro, Cuba’s leader and Fidel’s brother, shook hands with U.S. President Barack Obama in April.  The question that came to mind was whether Cuba would soon be on the radar screen of American businessmen and investors.

In December, President Obama stated, “In the most significant changes in our policy in more than fifty years, we will end an outdated approach that, for decades, has failed to advance our interests, and instead we will begin to normalize relations between our two countries.  Through these changes, we intend to create more opportunities for the American and Cuban people, and begin a new chapter among the nations of the Americas.”

If a normalization of relations occurs between the U.S. and Cuba, America will finally catch-up with more than 100 other countries that have embassies in Havana.

While this change in American foreign policy toward Cuba was positively received by many Americans, including some, but not all of Florida’s  large Cuban-American population, I’m not sure how open the Castro regime will be to American investment.  While it’s critical for Havana to keep flowing the tens of millions of  dollars of transfers from Americans of Cuban descent to family members in Cuba, I’ve concluded that the former revolutionaries in Havana will not move quickly to embrace fully-opening the American spigot of investments.

Despite all the rhetoric and photos of beautiful beaches, thousands of colonial buildings and 1950s American cars, one must remember that today’s Cuba is still a totalitarian country. Cuba is on a very short list of countries still embracing old-style communism and centrally-controlled economies. Cuba and North Korea are at the top of the list of countries still embracing this failed economic model.

After the revolution, Cuba became dependent on other countries, first the Soviet Union, whose financial support dwindled when the Soviet Union fell, and then more recently Venezuela. With oil prices substantially down, Venezuela has it’s own economic challenges and its financial support of Cuba has substantially diminished.

It’s clear that Cuba’s leaders more clearly see the past than the possibilities for the future.  They remember when American companies dominated the Cuban economy before the nationalization of foreign property and businesses by Fidel in 1960. I don’t believe that Havana will quickly embrace a chance of the repeat of an American domination of their economy.

It’s one thing for President Obama to embrace a path toward normalization of relations with Cuba. It’s another discussion regarding Cuba’s ruling elite welcoming Obama’s overtures.

Today, Cuba is still a very foreign country for international business.  Memories of the revolution continue and are a mainstay of the country’s educational system. Three generations have now heard the government’s propaganda, regarding both revolutionary ideology and evil America.  Access to outside news is minimal. Few Cuban’s have access to the internet and mobile phones.  More than 70 percent of Cuba’s working population are state employees, who receive around $30 each per month in the local currency.  Cuba is it’s own version of the movie “Back to the Future,” which the Cuban version should be more appropriately titled, “Forward to the Past.”

Other countries including Brazil, China, Venezuela and the European Union have all had a head-start in Cuban investing.  If something goes wrong for any foreign investor, the nightmare begins.  Cuba’s courts have never ruled for a foreign business against the Cuban government or government entity.  The recent jailing after a secret trial, of British investors in Havana’s luxury Saratoga hotel, should be a warning to all potential foreign investors, not just Americans.

My conclusion is that Raul Castro, who has stated that he will step down from power in 2018, and Cuba’s ruling elite, are not going to quickly embrace President Obama’s overtures and open the floodgates of American investment.  Doing so would result in a flood of dollars from Cuban-Americans in the U.S., which would likely in short-order result in the economic power in Cuba moving from Havana to Little Havana in Miami and elsewhere in the U.S.

Author: Jeffrey Friedland

Beijing Acts and the Country’s Economy Rebounds

With summer around the corner, China’s growth outlook is very similar to what we saw just one year ago.  Beijing has unleashed a combination of fiscal and monetary loosening, combined with administrative actions to stimulate the country’s economy. The bottom line is clear.  If China’s government wants to increase short-term growth, they can and will.  My conclusion is that once again Beijing’s actions will generate the desired results. Actions that serve as a confirmation of Beijing’s push for short-term growth include the People’s Bank of China’s actions three times over the past six months to decrease its benchmark interest rate.  These actions by the central bank were combined with two reductions in  bank reserve ratios, coupled with very targeted liquidity injections. Where does this all lead?  Fort this quarter it’s likely that China’s quarter-on-quarter annualized GDP will increase to 6.9 percent. Full-year growth for all of 2015 will likely end slightly lower. This is close to Premier Li Keqiang’s growth target of approximately 7 percent for this year. What about the coming years? My conclusion is that a growth rate in the 7 to 7.2 range over the next few years is definitely a possibility.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets and facilitates cross-border equity and strategic transactions.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange-listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of All Roads Lead to China, an investor roadmap to the world’s fastest growing economy. It is available in both print and Kindle editions. 

He has been featured or quoted in numerous publications and media including the Wall Street Journal, USA Today, NBC News, CNBC, the South China Morning Post and Forbes, and is a regular contributor to the magazine Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets and global investing.

The Formation of the Asian Infrastructure Investment Bank, a Milestone for China

In October 2014, China’s government formally established the Asian Infrastructure Investment Bank. Its stated purpose was to provide infrastructure financing for Asia.  The Bank was immediately seen by many as a rival global financial institution to the World Bank and the Asian Development Bank, and its formation was immediately attacked by the U.S. government.

Compared to the Asian Development Bank, with a capital base consisting of funds paid in and pledged of $160 billion and the World Bank’s capital base of $223 billion, the Asian Infrastructure Investment Bank will start with $50 billion of capital contributed by China. The Asian Infrastructure Development Bank has a goal of achieving $100 billion.

The key difference to the World Bank and the Asian Development Bank is the word “infrastructure” in the name of the Asian Infrastructure Investment Bank. This focus on infrastructure is key.

Reacting to the social and political objectives of advanced economies, including most notably the United States and western European countries, loans from both the World Bank and the Asian Development Bank not only provide funding for infrastructure but also social policy objectives including environmental protection and gender equity. In contrast, the Asian Infrastructure Investment Bank will focus solely on infrastructure development.

Infrastructure is critical for Asia and the continent’s economic and social development. Estimates indicate that $8.22 trillion in infrastructure investment is needed for Asia over the ten-year period from 2010 to 2020.  It’s easy to compare this huge infrastructure requirement to the minimal infrastructure investments made  by both the World Bank and the Asian Development Bank.  For the financial year 2014, the World Bank spent $24.2 billion globally on infrastructure and the Asian Development Bank’s total expenditures, which included infrastructure, totaled $211 billion.

The need for massive infrastructure development is clear when population and per capita gross domestic product are analyzed.  More than 700 million people in Asia live below the poverty line. Of these, more than half live in South Asia. Some of the world’s least-developed countries, those most in need of massive infrastructure development, include Myanmar, Cambodia and Laos. For comparative purposes, the most recent data indicates that per-capita GDP approximates $1200 for Myanmar, $1000 for  Cambodia and $1600 for Laos, compared to approximately $7000 for China and $39,000 for Japan.

Throughout Asia, infrastructure development is a necessity to provide and support economic growth, improve the environment and increase telecommunications and internet connectivity within the region and globally.

Key to Beijing’s decision to form the Asian Infrastructure Investment Bank was its conclusion that existing global financial institutions, most notably the World Bank and the Asian Business Development Bank, lacked the focus, desire or the resources to meet Asia’s infrastructure needs. Stated Bank infrastructure development objectives were identified as the construction of railways, airports, and telecommunications projects throughout the region.

China was also motivated to establish the Asian Infrastructure Investment Bank due to the lack of reforms at the International Monetary Fund, the World Bank and the Asian Development Bank to reflect an increased role of developing countries in the global economy. Based both on population and economic output, developing countries are underrepresented at all three institutions.

Governance of these global financial institutions is also a continuing issue for developing countries. The Asian Development Bank continues to be dominated by Japan and the United States, with each country having twice as many votes as China. This governance is a lack of acknowledgment of China having the largest economy in Asia and the world’s second largest economy.

While China’s economy is approximately the same size as that of the United States, it has less than one-third the number of World  Bank votes than the U.S. China’s voting power at the World Bank is only slightly more than that of France, which has an economy one-sixth its size.

The BRIC countries of Brazil, Russia, India, China and South Africa collectively comprise 21 percent of the world’s economy, and 43 percent of the world’s population, but their votes at the International Monetary Fund, the World Bank and the Asian Development Bank are miniscule relative to the size of their economies and populations. Together they hold 11 percent of the voting shares at the International Monetary Fund and 14 percent of the International Bank for Reconstruction and Development.

Five years ago there was an attempt to adjust minimally the voting at the International Monetary Fund, the sister institution to the World Bank. That effort failed, to a large extent due to the dysfunctional relationship between America’s President Obama and its Congress. The lack of progress in reforming the International Monetary Fund’s governance solidified Beijing’s resolve to change international finance by taking proactive steps to establish a new Asian economic order, with the establishment of the Asian Infrastructure Investment Bank as an early step.

The establishment of the Asian Investment Development Bank was a triumph for Beijing. Publicly and behind the scenes, America aggressively lobbied its allies to not participate.  When the bank was inaugurated, the American allies, South Korea, Indonesia and Australia were conspicuously absent.  While the U.S. indicate concerns regarding the Bank’s environmental impact, governance, labor and purchasing standards, the real reason was blatantly clear. The U.S. saw China’s role in establishing the Asian Infrastructure Investment Bank as a threat to the continuing dominance of global financial institutions by the U.S. and its allies.

For Asia’s developing countries, the strong U.S. opposition to the establishment of the Bank reflected a cold-war way of thinking that wasn’t responsive to their development objectives and their aspirations for their countries’ future.

As of mid-April 2015 the Asian Infrastructure Investment Bank had 57 countries as charter members, including America’s staunch allies, the United Kingdom, Germany, Australia and South Korea. Fourteen of the Group of 20 industrialized nations are now members. China, based on its gross domestic product, is the largest shareholder of the Asian Infrastructure Investment Bank, but as new countries join, its percentage ownership will decrease.

The establishment of the Asian Infrastrastructure Development Bank was a diplomatic success for China and a foreign policy and diplomatic failure for the United States.  To a large extent, the United States only has itself to blame for the Bank’s establishment.

The establishment of the Asian Infrastructure Development Bank by China is an event that is shaking up the post-World War II, American led, global financial order.  It should be seen by the United States as a real warning shot, is indicative of the decline of U.S. global power and the disarray of U.S. foreign policy. In the end, the U.S. failure to persuade its closest allies not to join the Asian Infrastructure Investment Bank, speaks for itself.

It’s logical to assume that China will rightly use the Asian Infrastructure Investment Bank to extend its influence in Asia, at the expense of the United States and Japan. If this occurs, it will be similar to how advanced economies used the World Bank and the Asian Development Bank to advance their own agendas over the past decades.

The establishment of the Asian Infrastructure Investment Bank is a platform for China to challenge Western-backed global financial institutions. The Bank should have a significant  impact on Asia’s developing countries and will enhance China’s role and stature in the region.

The Asia Infrastructure Investment Bank will bring billions of dollars of new investments to Asia and as importantly will provide a greater voice to developing countries in their development future than their current limited role at the World Bank and the Asian Development Bank.

The Bank will also provide China with an option for some of its large foreign exchange reserves of almost $4 trillion. specifically the repatriation of  some of these funds from Euros, dollars and Swiss Francs to development within its Asian sphere of influence.

My hope for China and all of Asia is that the establishment of the Asian Infrastructure Development Bank will jolt other global multilateral financial institutions to be more inclusive, and usher in a new era of global cooperation between mature and developing countires, which will benefit the entire planet.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of the book, All Roads Lead to China, which is an investor road map to the world’s fastest growing economy, which is available in both print and Amazon Kindle versions.

He has been featured or quoted in numerous publications and media including the Wall Street Journal, USA Today, NBC News, CNBC, the South China Morning Post and Forbes, and is a regular contributor to Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.

China’s Growth Targets Need to End

It’s no easy task for China’s leadership to govern a country of 1.4 billion. It’s a burden that no leader of any other advanced economy faces.

Included in Beijing’s overall challenges are its domestic and economic policies, both of which are intertwined.  Sufficient growth must be maintained when a key objective of the Communist Party and Beijing’s leadership is maintaining social order and delivering for the country’s population a better quality of life.  For much of China’s population a better quality of life translates today to a good job and increasing income. Longer-term it includes a better environment including reduced pollution.

It’s difficult for many in the western world to understand Beijing’s pressure to create more than 10 million new urban jobs annually.  Last year, Beijing succeeded and 13 million new urban jobs were created, which I view as a great economic success despite a year of lower GDP growth.  To put this monumental task in perspective, the United States only needs to create 1.3 million new jobs annually.

All aspects of continuing to evolve China’s economy from one that is centrally planned to a market economy with Chinese characteristics is continuing to be a major challenge for Beijing.

The headwinds that China’s economy faces are many. Most of us like to think that Beijing’s leadership has significant control over its own economic destiny.  To a large extent this is wishful thinking, not based on what China’s leadership is able to impact, but more importantly given on what its leadership is unable to impact. Premier Li Keqiang has stated that China has more economic tools available if the “new normal” of reduced growth impacts job growth and income, but Beijing can’t impact foreign demand for China’s manufactured goods.

It’s clear that China’s three decades of growth in excess of 10 percent are long gone. Logical thinking results in the conclusion that China’s economy couldn’t continue to grow at the above 10 percent rate indefinitely, but many of us believed or wanted to believe that the economy  would.

This becomes even more clear when one understands the basic “law of large numbers,” which applies not only to companies, but also to nations. Specifically, the larger an economy grows, the harder it becomes to keep growing at that same rate.  For example, if China’s economy grows at 7 percent in 2015, it is actually generating more additional economic output than its economy did in 2007 when China’s growth rate was 14 percent.  If you think about it, it’s easy to comprehend. But if most of China’s population are fixated on growth of less than 10 percent as being unacceptable, it’s a challenge for the leadership in Beijing to convince them otherwise.

China’s 7 percent growth target for 2015, which was confirmed when the National People’s Congress met in March, should have been viewed internationally as a very positive announcement.  But it wasn’t. Instead the news was generally reported in the context of comparing the 7 percent target to the years of growth in excess of 10 percent.  For the most part, the global media reported the 7 percent growth target as a failure, and viewed the reduced growth target as evidence that there was something structurally wrong with China’s economy.

One conclusion is apparent.  Many foreigners and governments want China to fail, not understanding that both their own country and China can’t both thrive at the same time. For example, China doesn’t have to fail for the U.S. economy to flourish. Instead, what should have been highlighted by the international media was how strong China’s projected growth for this year is compared to the projected growth of both advanced economies and other emerging market economies.

It is an eye-opener to compare China’s targeted growth rate with that of the world and the United States. The International Monetary Fund (IMF) has projected global growth for this year at 3.5 percent, less than half the rate of China.

The U.S. economy is projected to grow at a rate of 3.6 percent this year. Yes, China’s projected growth rate is almost double that of America’s.  It’s true that the U.S. is an advanced economy, one that is not expected to grow at as great a rate as an emerging economy, but America’s growth rate was reported as a major accomplishment, while China’s growth rate of double that of the U.S. was reported as a failure.

The headwinds that China’s economy faces are many and clear.  Over time, growth is a function of labor, capital and productivity.  When all three increase, as they did in China for over three decades, growth was above 10 percent.  But, China’s working age population peaked in 2012; investment also peaked at 49 percent of GDP. a percentage few countries have ever seen;,and China’s technological gap compared to advanced economies is narrower than it has been in the past, resulting in lower growth from productivity gains.

But let’s look at some good news regarding China’s economy.  China’s average disposable income outpaced the country’s GDP last year, increasing 8 percent to approximately  $3245.  China also created 13 million new urban jobs in 2014. Unemployment is at a somewhat reasonable rate of 5.1 percent.

As long as China’s leadership is able to keep income and employment levels up, Beijing’s leaders should have the political ability to proceed with some of the more painful reforms that are generally acknowledged as necessary, but that Beijing avoided implementing last year.

China’s economic miracle was driven by the growth of the country’s export industries. If there is one major factor since the 2008 global financial crisis that impacted China’s growth rate, it has been a weak export sector. Since 2008, the global economy has sputtered, reducing imports of Chinese manufactured goods. Decreased demand for China’s manufactured goods are the primary reason that the “new normal” targeted growth rate for 2015 is 7 percent. Exports, which have been major drivers of China’s growth are difficult for Beijing to impact. The tumble in price of the euro currency and the yen, are other factors that  Beijing can’t control, but which also have a significant impact on China’s exports and therefore its economy and growth rate.

As China’s economy continues to evolve to more of a market economy, one increasingly based on private enterprise and entrepreneurship, the country’s sustainable growth is increasingly less dependent  on infrastructure development, spending and investment by local governments, and state-owned-enterprises.  While these can all be easily impacted by Beijing policies and will “deliver growth,” most will not lead to long-term sustainable growth.

All of this leads me to China’s annual growth targets.   Growth targets may be appropriate in a Soviet style planned economy, but they’re not appropriate for today’s China, as the country moves further toward its goal of a market economy with Chinese characteristics.

China’s practice of targeting growth rates is disadvantageous and should be ended. Stating a growth target establishes a measuring stick that becomes problematic. Targeting growth puts pressure on Beijing to “deliver growth” at all cost. The growth measuring stick also puts pressure on local government leaders and management of state-owned-enterprises to deliver growth at all costs. Annual growth targets establish unrealistic expectations for China’s economy from entrepreneurs and most importantly and of great concern to Beijing, the hundreds of millions of China’s workers.

Last year, in 2014, China missed its growth target by a tenth of one percentage point. This became an embarrassment for Beijing and also for local authorities who felt pressured to achieve their annual numbers. A result was  increased local debt, and the continued operation of many inefficient and polluting smokestack industrial operations that rightly should have been closed.

If targeted growth is not met, it also creates anxiety for China’s population, which can negatively impact consumer spending, increasingly important as a driver of China’s economic growth.

What is the alternative? Instead of a growth target, Beijing should instead focus on job growth and income. More importantly China’s leadership should implement long-term strategies to deliver more and better jobs, grow income and provide a better environment for China’s population of 1.4 billion.  This is definitely a difficult task, but one that is easier for Beijing to achieve if it isn’t focused on publicly-announced GDP growth targets.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of the book, All Roads Lead to China, which is an investor road map to the world’s fastest growing economy, which is available in both print and Amazon Kindle versions.

He has been featured or quoted in numerous publications including the Wall Street Journal, USA Today, the South China Morning Post and Forbes, and is a regular contributor to Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.

Will 2015 Be The Year The Yuan Becomes a Global Reserve Currency?

For too many years China has not been taken seriously on the global economic stage.  That may change later this year when it’s likely that the global economic order will be shaken up.   For the first time, China’s currency, the yuan, could be endorsed by the International Monetary Fund (IMF) alongside the U.S. dollar,  the euro and other major currencies as a global reserve currency.

Assuming that this actually happens, it’s something that is long overdue.  A little over thirty years ago, in 1978, Deng Xiaoping initiated economic reforms that were described at the time as “socialism with Chinese characteristics,” which initiated what has been known as China’s economic miracle.

With a population of 1.36 billion, and a recent historical economic growth rate that exceeded that of all major countries,  it was inevitable that China would win the title of the world’s largest economy. It wasn’t a question of if, but when.  It happened last year when the United States lost the title of the world’s largest economy to China. It was a title that the U.S. held since 1872, for 140 years, when it unseated the United KIngdom as the world’s largest economy.

The Chinese economy is now valued at $17.6 trillion, slightly greater than the $17.4 trillion the IMF has estimated for the United States. By the end of this decade the IMF has projected that China’s economy will be valued at almost $27 billion, 20 percent larger than that of the US, which the IMF is projecting at slightly over $22 billion.

While news of China becoming the world’s largest economy was reported by the Western media, it was only in the headlines for a few days. Few western commentators delved into the implications to analyze what this meant for the future of the United States, China and the global economy.

It’s clear what this means to China and the country’s future.  Many have described this century as China’s century, and becoming the world’s largest economy is key to that becoming a reality.

But Ignored by the western press was the potential impact on the United States.  Today, slightly over 60 percent of all global reserves are held in U.S. dollars.  Many have suggested that this by itself sets the stage for what has been characterized as a “free ride” for the United States.  It has allowed the U.S. Federal Reserve to keep interest rates at near zero, seemingly indefinitely. It has also enabled the Federal Reserve’s printing presses to increase America’s money supply by over $4.5 trillion.

The dollar’s status as the primary global reserve currency has forced foreign governments to hold their reserves in dollars, regardless of whether they wanted to.  It also resulted in U.S. public debt skyrocketing to $17.8 trillion at the end of September. Of this debt, $6.1 trillion or approximately 47 percent was held by foreigners, the largest of which were China which held $1.3 trillion and Japan which held $1.2 trillion.

The role of the U.S. dollar also enabled America’s budget to skyrocket, to a projected $469 billion this year, and as projected by the U.S. Congressional Budget Office to $1 trillion starting in 2022.

Twice-a-decade the IMF conducts a review of the basket of currencies its members can count toward their official reserves. The next review is scheduled for later this year. With China’s economy now the world’s largest, the IMF will discuss whether the yuan should be a global reserve currency alongside currencies including the U.S. dollar, the Japanese yen, the Swiss Franc and the United Kingdom’s pound.  If the IMF allows the recognition of the yuan as a reserve currency, it will accelerate the decline of the U.S. dollar’s dominance in global trade and finance.

To obtain approval from the IMF, China will need to satisfy the IMF”s economic benchmarks and obtain the support of most of the organization’s 187 member countries.

Approval will be partly based on whether the IMF decides that the yuan is “freely usable.” China’s currency may now be able to pass this test, partly due to meeting the other IMF requirement of being a large exporter.

Due to cross-border yuan denominated trade, the proportion of China’s trade that is currently settled in the yuan has risen to about 20 percent, the market for yuan-denominated Dim Sum bonds has grown to almost $73 billion from zero in a little over seven years, and Beijing has also increased foreign access to the country’s financial markets, with agreements to allow the yuan to trade freely in Frankfurt, Hong Kong, Singapore and London.

The U.S. could potentially torpedo the yuan’s becoming a global reserve currency because the change requires somewhere between 70 percent or 85 percent of the vote under the IMF’s bylaws, and the U.S. has 17 percent of the votes.  But politically this would put the U.S at odds with most other countries, including China and other emerging market economies. So, a U.S. veto is unlikely, and I believe that the yuan will obtain approval.

The benefits for China of the yuan becoming a reserve currency are significant. If the yuan is designated a reserve currency it would allow central banks, especially those in developing economies to hold yuan denominated assets, and diversify not only away from the dollar, but the euro, Swiss franc and yen as well.

In fact, the yuan will likely be more widely used in both financial markets and in currency trades than Japan’s yen or the United Kingdom’s pound.

When, not if China’s yuan achieves global reserve currency status, China’s century will have truly begun.   No other economic event will have as much potential impact on the global economic system.

Author: Jeffrey Friedland

Original publication date: January 3, 2015

 Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company and a director of a New York Stock Exchange listed company with all of its business operations in China.

He has been featured or quoted in numerous publications including the Wall Street Journal, USA Today, the South China Morning Post and Forbes, and is a regular contributor to the magazine, Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.

Will the New Year Bring a Renewed Interest in Brazil by Global Investors?

The Global Financial Crisis of 2008 impacted both mature economies and emerging economies. Emerging markets were particularly impacted, as the crisis ushered in an era of reduced interest by global investors in emerging markets.

Today, the continuing military advances by ISIS in Iraq and Syria, a slowdown in China’s growth rate, the global and regional risks from the spread of ebola, and concerns regarding Russia’s increasingly provocative military actions have all contributed to many global investors retrenching. Many are now taking a wait and see attitude regarding investing in emerging markets.

Reduced oil prices have added to global uncertainty and governments that have a high dependence on oil revenues are being severely impacted. But there are beneficiaries of reduced oil prices. Lower oil prices are having a positive impact on consumers. Paying less for fuel and energy enables consumers to have increased disposable incomes, leading to increased spending on consumer goods.  Consumer spending in the U.S., Europe and other mature economies this Christmas season will likely be a beneficiary.

As we enter a new year, global investors can’t ignore Latin America and its population of 588 million for very long. Two countries, Brazil and Mexico dominate Latin America’s economic output.

With the continuing drug wars and corruption monopolizing the news from Mexico, I’m increasingly focused on Brazil, the world’s seventh largest economy.  With a population of over 200 million, and a GDP of over $2.2 trillion, the entire economy of South America is dominated by Brazil.

President Delma Rousseff’s won a narrow victory over Aẻcio Neves, in the tightest Brazilian presidential election ever. There is hope that the narrow lead will cause Rousseff to change the countries economic policies, but many have questioned how willing the new government will be to make the necessary changes.

A positive development is the appointment of Joaquim Levy as Brazil’s new finance minister. Mr Levy received his doctorate in economics from the University of Chicago and has served with the International Monetary Fund and the European Central Bank.

Levy  immediately committed to restoring balance to the country’s struggling public finances. Many view the appointment of Mr. Levy and his economic team as one of the potentially biggest turning points in Brazil’s economy since Ms. Rousseff took office from her predecessor, the immensely popular Luiz Inácio Lula da Silva in 2011. There is hope among many global investors that Levy will enjoy more autonomy from Rousseff’s administration regarding economic policy than previous finance ministers.

My conclusion is that Brazil will once again be on the radar screens of an increasing number of global investors.

Author: Jeffrey Friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

Mr. Friedland is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc., a life sciences firm that enables investors to participate in the growing worldwide cannabis industry.