It’s too late dude, we have bought too much rubbish!

Yes, the situation is quite hopeless. We are of course talking about China. Google just revealed that doing business in China is just a stupid idea. In reality, you can’t make Chinese money like the way the Chinese make American money. Reality bites and it is painful. Least many people are carrying buckets of money to dump into Chinese factories, let it be a reminder that China has the dubious title of being the world’s largest un-elected government. It is also propped up by an active army of over two million troops. And there is no such a thing as human rights there. What the government does, no body can say no to it. And it takes another brave giant like Google to confront it head on and loose the fight.

But China is unlike any other country. It holds about two trillion dollars worth of US security papers. If Chinese interests (read as those who govern China) are threatened inside their country, then either of two things will happen. Either the rulers will escape from China and head for the US and live off the money that is stashed away in the US, or if the threat is from outside China (could be outside forces working inside China like Google or Baidu), then China will throw their security holdings into the market and destabilize the US dollar! Either way, it looks like a no win situation for everybody.

And how did the present situation came about in the first place? There is no doubt that it came about because of the great buying spree from the Americans for Chinese goods for over a decade and a half. The situation was made worse by the mad rush to pump in money into China to start even more manufacturing plants (mostly American money). Today we have an excess of Chinese factories making everything from Christmas trees to nuts and bolts, and their outputs have to be channeled to Chinese domestic buyers as western orders withered under the strain of global monetary crisis. Traditionally, the Chinese don’t buy made in China products if they have a choice. So the Chinese government pumped in 650 billion and gave the money to its citizen to go on a shopping spree. Fortunately the trick did work, but then, how long could the prime pumping last?

On of the side effect of the infusion of money to the Chinese citizen was that the realty sector got a boost. Not that it is no good for the housing and property sectors, but it is just bad economics for a large number of village folks beating each other to buy property for perhaps the first time (under the communist system, their cadres live in low rent houses provided by the state) With easy loans from banks (the banks were told to extend lending), property prices just ballooned because of the artificial demand. You just can’t build houses fast enough. Besides, the Chinese people have that pent up feeling of buying for themselves so called ‘affordable luxuries’ so that they can at least consider their life not wasted under the communist regime. For years, they have heard so much of their brethrens enjoying luxurious living (from their point of view) in South East Asian countries.

Fearing that the situation in China could get out of hand, the Chinese government has just instituted lending tightening. Fears of asset bubbles are just too great and real, no thanks to the knowledge that a similar bubble had catalyst the start of the financial meltdown in the US in 2008. What happened in the US should not be allowed to happen in China because there are about a billion frustrated people there waiting in the fringes for a chance to change their government! And whatever happens in China would have a great bearing to the rest of the world as well. Only the total melting of the polar ice caps is more frightening, perhaps!

Are we moving into a double dip recession?

2009 is over, and might as well. There was not much of a hope then; after all, we were struck by the world economic crisis of end 2008, which was caused by the housing crisis of the US. Other things came into play as well, especially the shooting to the roof of oil prices and other commodity prices. In retrospect, there was this over confidence in everything. It was early 2007 and because everybody was so sure that they could just buy their way to riches. The credit card people were signing up everybody they can lay their hands on in the US. Even retired people who have no more jobs were lured into subscribing to the plastic card. And as a result, it was spend, spend and more spending, without having to worry where their next dollar was coming from. So were people asked to buy houses and entered into mortgages that they can’t afford to pay. But then, nobody cares, and the authorities who should be the guardians, never even bat an eyelid! One bad thing leads to another and thus begun the world economic crisis.

The shock came when Lehman Brothers was declared bankrupt at the end of 2008. The reverberation from the bank collapse went round the globe. The impossible has happened. At the other end of the globe, in China, people were still grappling with production runs, unaware that the orders that they had secured before would not be honored by buyers that had suddenly have their bank credit cut off. It was here that all the good things got started. With China getting to host the Olympics in the summer of 2008, there was a mad rush to build stadiums and sport facilities. It was this foolish undertaking that caused commodity prices to shoot upwards. The oil price increased followed suit and everybody then has to chase around for most of the things that is available for buying. Food prices went so high that poorer countries had to seek World Bank loans to secure just enough food for their citizens. But in the US, the buying binge just went on as usual, with budget deficit shooting through the roofs. The people here never for once believed their money will run out; after all, there are so many countries that found it convenient to park huge assets in US Treasuries.

Unfortunately the truth begins to strike just when everybody is off guard. The reality is that you can’t go on spending without the roof collapsing. And the roof did collapse with Lehman Brothers as well as many others. 2009 was a terrible year as far as my memory goes. For once, people have to pray very hard, just so that they can get their next order. But orders just simply disappear. Nobody seems to be buying any more! The governments around the world were shocked beyond beliefs. When the reality set in that there is a money crisis, governments around the world had to dig deep into their pockets to put money into their citizen’s pocket so that domestic consumption can continue. In this respect, China had to pump in six billion dollars just so that their manufacturing set-ups can survive the drought of orders from the US. In the US, the government had to buy into the banks and restore confidence so that there are no runs on banks. So too were countries like UK, Germany and Japan, where arrangements were quickly made to pump prime their economies to prevent total collapse. And they hope these measures will get them trough to the next wave?

Looking back again at China, where domestic consumption have continued unabated, the financial policies seems to have worked. But on deeper digging, we find that although the economy is surviving, there is an undertone of great anxiety. The confidence level is no more like pre-Olympics level. The manufacturers are just holding their breadth. Although orders seems to be picking up, the reality is that these orders are coming from goods that are destined for year end festive sale for the US and Europe. What will happen after Christmas? Will there be continuing orders then? If we were to look at the situation in the US, where it is supposed to be the consumption market of the world, there is dark cloud everywhere. Unemployment is everywhere. Due to the financial crisis, firms had managed to trim down to a size that there is no unnecessary bleeding. A lot of inefficiencies were blotted out. The result is that there is no need to look for workers to help out. Everybody is working trim, and when there is real work to be done, overtime is the preferred way, just in case the order dropped off the cliffs unexpectedly.

To be sure, there has been an increase of goods orders. But the reality is that these orders are mostly to replenish those things that have been made to run low due to the economic crisis. ‘Unnecessary inventories’ is that dirty word that nobody wants to be caught out with. So what we see today is a world working with very little fats. It is a new order indeed! It is a world working on the Toyota model of ‘just in time manufacturing’ where you will only order parts for assembling when you get a real order. It is no more speculating, and you do not buy forward at a low price to profit and sell at a higher price later. It is a ‘lean economic’ model. But it is appropriate to look closely at China again. A lot is still going on in this middle kingdom. They are not only buying commodities to sustain their manufacturing, but they are also buying companies around the world, and other big brands as well. Of course they have a big pocket and they still work on an old world basis. It is the Chinese mentality. They know that it will work as there have been seen to work for thousands of years. But it is a new world order. Having the power of a holding cost might not necessary get you to the next doorway!

And the Copenhagen affair is over and gone! There was much hope that the world will be able to take the opportunity to come to an agreement, between the rich and the poor countries to effect an upgrading in technologies that can affect our climate. Unfortunately, nothing came out of it, and it is doubtful there is salvation to that. The truth is that the rich countries or their governments do not see it as a good political move to give away the much need money and the poor countries can’t afford to make any changes to their technologies as there is no more money around. Overall, the world will be heading towards self destruction by over burning their fossil assets. But because there is no inertia of the monetary kind, and when money doesn’t flow, the poorer economies will get poorer and thus will impact the recovery of the world economy. People are just waiting for the mullahs to come and they will still be waiting come 2012 or even later! We have missed the chance to get a turnaround this time.

There has lately been a fear that our economic problem is veering into a double dip recession. This has been sounded out by non other than the Honk Kong Chief Executive in a New Year message. He should know what he is talking about as he can see the money movements (or the lack of it) and he is close to the manufacturing heartland of the world. He cautioned that a double dip recession is a possibility. From the way it looks, especially the scenario in US, UK, Greece, Spain, Iceland and some other unfortunate countries in Africa, there is indeed a new world order. One in which the majority of the people have no money to continue their consumption behavior of the past. A closer look at the US will tell us that for Americans to continue spending, they will have to print more money and hold inflation level at the 2009 level. It is a double blind for the US government. To print more money will devalue the dollar against other currencies and will effectively made buying more expensive for Americans. Inflation will reign and the poor will get poorer. Buying spree will nosedive. As a result, the world’s manufacturer (especially China based) will go back to receiving no new orders. How much longer can they hold? Perhaps another economic prime pumping exercise again? Is it possible for a double or even a triple dip recession?