The world’s factory

China is often referred to as the world’s factory due to its overwhelming presence in manufacturing.  In 2011 it superseded the US in factory production ending a 110-year streak and they hasn’t stopped there in 2017 China accounted for nearly 50% of global manufacturing output. Needless to say, the country lives up to its title, but it wasn’t always the case. Prior to 1978 Chinese manufacturing was almost nonexistent.

       Many aspects of the success of Chinese manufacturing find their origin in the reforms of Deng Xiaoping. He knew that if China was to become competitive it would need to open to the world markets. He dislodged many of the state-owned monopolies and supported the creation of privately-owned business in the country. In the early 1980s he opened the country up to foreign investment through the creation of the free trade economic zones. The cities of Shenzhen, Zhuhai and Shantou of Guangdong Province. These cities today are the great hubs of Chinese manufacturing. While being established in the 80s it would take 10 or so years for the cities to become the hubs that they are today.

      But the question remains why China, and the answer is twofold logistical capability and technical skill. While China’s cheap labor costs seem to be the obvious answer as to its success it isn’t that simple, while labor costs in China are cheap compared to the US and other developed nations, they are still marginally expensive compared with other developing nations such as Vietnam, India or Malaysia. The real catch in Chinese manufacturing is its logistical capability. Due to the close relation between business and the government Chinese factories can expand at scale very quickly, hiring new personnel, expanding physical capabilities and reworking logistics for expanded imports and export of materials, all at minor costs, this is the real hook that keeps business like apple producing in china. The other facet is Chinese technical skill, when we think of manufacturing jobs we tend to envision the assembly line one job fits all approach. This is true in many cases apparel and toys fit this mold, China also assembles highly technical equipment such as cars, phones, and laptops. In these industries workers need to be skilled and thus trained on how to manage equipment and that isn’t cheap. This is where the country shines its ability to scale highly technical manufacturing has been on its greatest accomplishments. As China shifts however from a export growth economy to a consumer grown one we will have to look at how Chinese manufacturing changes.

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Hong Kong When Business and politics Collide

Hong Kong is one of the great finance cities of the world. Known for banking, It stands as a focal point for regional business in the east Asia arena and attracts capital and investors globally. Hong Kong’s history has played a vital role in shaping the successful business culture it has today but that same history can be seen as the reason of today’s unrest. Hong Kong was Seeded to the British in 1841 and was under British rule until 1997. During that time Hong Kong and its people were increasingly exposed to western values of which was assimilated into the local traditions. This is how Hong Kong became the preeminent center of finance in the Asian world, its time under British rule allowed it to acclimate itself to world markets allowing for a business-friendly attitude.

       When Hong Kong was returned to China in 1997 it was guaranteed semi autonomy for a period of 50 years lasting until 2043. Under this 1 country 2 systems rule Hong Kong would be allowed to govern itself essentially keeping everything business as usual. Business were able to operate freely as they have done, and Hong Kong kept its much-regarded freedoms. This was due to the inherent strength of Hong Kong compared with other major Chinese at the time. However, times change Hong Kong while still being a banking epicenter is just one of many well integrated and successful Chinese cities. This may be why the government of china has been pushing for more integration of Hong Kong into the mainland prompting unrest and protest by the Hong Kong people.

     The latest Protest began at the end of March when an Extradition bill was proposed by the government of Hong Kong that would enable China to extradite people who have committed a crime in mainland China from Hong Kong. This is a major issue to the people of Hong Kong as many everyday civil liberties can be considered an offense in mainland China stoking fear that mainland China’s censorship could come to the island indirectly. This prompted the protests that we see today as even as the bill in question is currently suspended the people of Hong Kong are still protesting to have it removed entirely trying to curb the mainland influence on Hong Kong politics. This has left the Business leaders in a rather precarious situation.

      Currently Hong Kong is unrest protests are a daily occurrence with no end in sight and no one is aware if or when the mainland forces of China will be called into the region. All of this creates a negative atmosphere to do business. Recently the protestors occupied Hong Kong’s international airport causing delays and cancellations of multiple flights. For business the end of the protest would mean back to normal. The line however is drawn on how to end the protest, business in Hong Kong walk a fine line. On one end supporting mainland China’s policies would allow for the investments to continue to flow into the region and potentially end the protest faster but would cost Hong Kong the precious autonomy that its citizens prize. Alternatively supporting the protest to push off mainland politics doesn’t seem likely as it could hurt their bottom line as the Mainland could pull out investments in the region. Recently Hong Kong lowered its GDP growth report to between 0% and 1% from 2% to 3%. For now at least the protests do not seem to be coming to an end, neither side will step down and business is expected to slow down in the city as the unrest grows.

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Signs of the times

     Recently, we saw for the first time since 2008 an inversion of the yield cure for long term bonds. A yield curve inversion is when the returns for a long-term bond like the 10 year treasury bond see lower rates than another shorter bond like the 3 month bond or the 1 year bonds. Typically, longer term bonds have higher rates of return than shorter bonds because longer term bonds carry a higher risk and thus to attract investors- the rates must be high enough that investors will be willing to take that risk. However, when there is an inversion that may mean that investors are getting anxious.

     Bond yields fall as prices of bonds increase and bond prices change following the laws of supply and demand. Ultimately, investors are wanting a secure place to put their money and thus buy up longer term bonds even though the rate of return will be much lower than usual. When this notion becomes widespread it causes the yield curve to invert making the returns on the safer short-term bonds higher than longer term ones.
        In a nutshell, this may have a negative impact on the economy as it relates to the markets. In lay man’s terms: The yield curve inversion is one of the most prominent indicators that a recession may be looming. We have seen recessions preceded by a yield curve in the last 2 cycle of recessions. The first cycle recession happened back in 2000 and then 2008. When the inversion appeared in recent market analysis, the DOW plunged losing value as investors became worried (skiddish) about the future. It is important to note that recessions

    Following yield curve inversion do not happen right away, the past recessions that have occurred have all begun on average around 15 months after the inversion occurred. While a recession is not here today, we may have been put on notice that the good times are not to last. Which is bad news for most investors. But not to worry, if your portfolio is diverse, you more than likely will survive. If you are an average middle class person/family- you may want to start preparing for the outcome.

All the best~