What could possibly slow down the Chinese economy?  How about interest rates. 

The People’s Bank of China raised interest rates again, four days after China announced that August’s inflation index rose to a 11-year high. Starting Sept. 15, the benchmark one-year lending rate will rise to 7.29%, from 7.02%. The one-year deposit rate will rise to 3.87%, from 3.60%.  The markets had expected the Chinese central bank to raise interest rates for a fifth time before the end of this year. China’s policymakers’ most recent rate hikes—coming three weeks since the last increase—coupled with other measures taken last week, have sent a strong signal to the financial markets that Beijing is willing to take more aggressive action to keep inflation under control.

5 rate hikes in one year? Wow.

Here is just another sign that China is not only a huge potential marketplace for US companies, but also a huge source of competition for future market-share. 

Google is having difficulty breaking into the market in China and China is the number 2 Internet market in the world.  Who is Google losing out to? Beijing based Baidu.com 

If Google is having difficulty, won’t others in other industries run up against stiff competition?  If Google is willing to go to great lengths to gain market dominance in China, doesn’t that also tell us about the potential of China from a business standpoint?  Google isn’t doing this for fun.  It also translates into a country that is growing and will be growing the wealth of it’s population, thus giving Hawaii another real estate market segment of Buyers in the future.  Something I have discussed before.

I read a good article regarding China’s step up as a global player in the Honolulu Advertiser today.  It is an associated press article, but was a good read.

China’s reach now extends from the Australian desert through the Sahara to the Amazonian jungle - and it’s those regions supplying goods for China, not just the other way around. China has stepped up its political and diplomatic presence, most notably in Africa, where it is funneling billions of dollars in aid. And it is increasingly shaping the lifestyle of people around the world, as the United States did before it, right down to the Mandarin-language courses being taught in schools from Argentina to Virginia.

As you have probably seen in the recent weeks, the news out of China (at least the news of products made in China) hasn’t been so great.  As we see the rapid expansion of their economy into a global player and their entrance into the global marketplace, we see that all will not be smooth sailing.   Expect problems, and a lot of them along the way, but I will bet that the pressures of governments and more importantly consumers will force the necessary changes in how China’s economy operates in the global marketplace.

In reading: China In Prime Position To Plunge Into U.S. Market, is there any question that China not only has huge potential to be a major market player, but has the potential to rapidly strengthen their postion in the global market and be the dominant player?

It would definitely take time, but with the amount of money that China has invested in the U.S. already (financing a large chunk of our national deficit), buying into U.S. businesses would put the U.S. in a vulnerable position of power economically and politically. 

Is now the time for us, as a country, to realize we soon may not be the dominant player in the global economic market?  Will politicians see China as too much of a threat and try and restrict this growth to power.  An interesting read, none the less.

I presume some part of China’s government will soon buy an equity stake in a major hedge fund or investment bank as well. … Anyone looking for financing to do a really big deal will, I would guess, soon make a pilgrimage to Beijing.

I had seen an article about a year ago that discussed how China has the ability to cause serious problems to the US economy because our wonderful deficit that we have is financed by China.  China Threatens Nuclear Option of Dollar Sales was a good read, though I do feel that if China did do something along these lines that it would hurt, China’s economy and the rest of the world economies as well.

In regards to housing:

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

I just read:

China’s sizzling economy grew even faster in 2006 than previously reported, bringing it closer to overtaking Germany as the world’s third-biggest, and its export-fueled foreign reserves have risen to a new high of $1.33 trillion, according to official figures released yesterday. The National Bureau of Statistics raised its estimate of China’s 2006 growth rate from 10.7 percent to 11.1 percent. the central bank’s research bureau said last month the economy was expected to expand by 10.8 percent this year. That was in line with projections by the World Bank and other economists, and would be China’s fifth straight year of growth in excess of 10 percent.

Wow!  Compare that to the US economic growth of 2.5-3% growth, and this will be China’s 5th straight year of 10% or more economic growth. 

The article does bring up a key point about runaway spending:

Chinese leaders want to maintain fast growth to reduce poverty but are trying to slow investment in auto manufacturing, real estate and other areas where supply outstrips demand. They worry that runaway spending could ignite inflation or leave banks and borrowers with dangerously high debt levels.

Remind you a little of the US stock market and Internet stocks?

You may get tired of me posting about China, but I feel it is very important to keep an eye on what develops here, and more importantly, what develops between the US and China. The Honolulu Advertiser posted China, U.S. Labor Leaders Talking about a visit from a U.S. labor delegation to China. I couldn’t have put any of this any better, so I took quotes from it and posted it below. To read more about my thoughts on China & it’s relationship to Hawaii’s economy and real estate market, read: (The Next Big Market Boom For Oahu?) (The Beginning Stages Of Things To Come) (The China/Asia Real Estate Boom Debate, Continued)

Was this the new world of globalism? It was, precisely. The boisterous Americans were representatives of …the second high-level U.S. labor delegation to visit Beijing in the past month.

Their presence here was the latest indication that a decades-old freeze between trade unions in the two countries had begun to thaw. At least some American labor leaders seem to be road-testing a new policy: “If you can’t beat ‘em, join ‘em.”
“This isn’t just the theory of ‘Workers of the world unite,’ ” said Maria Elena Durazo, head of the L.A. federation. “This is about very real needs that workers in both countries have.”
On June 30, the Standing Committee of the National People’s Congress passed far-reaching labor reforms that gave Chinese workers — on paper — rights that in some respects exceeded those guaranteed American workers. The Chinese have also in recent months signed labor contracts with two giant employers who have long resisted American union drives: Wal-Mart Stores Inc. and McDonald’s Corp.
But with China becoming an ever more powerful player in the global economy, and the Chinese union flexing its muscle against multinational corporations, American labor leaders have grown intrigued.
“The Cold War is over,” said Dave Arian, past international president of the ILWU and a member of the L.A. group. “The economy that they have in this country is essentially the same as we have in the United States.”
There would be no shortage of people prepared to argue that point, given the very different nature of the government’s role in the Chinese economy — both more involved as the owner of many enterprises and less involved in regulatory enforcement.
“Capital sees no boundaries,” said Durazo. “Why should labor see a boundary?”

Back to the China, and for that matter, Asia as the next hawaii real estate market boom debate.  The Honolulu Advertiser had an article headlining “New York Joins Hawaii In China Tourism Deal” 

“New York City tourism officials have reached a deal with the Chinese government to join Hawai’i and other selected American destinations with permission to promote themselves in the Communist nation. Under the agreement, the city will not be able to advertise directly to Chinese citizens, but will hire industry representatives to work with local travel agencies and other providers, …”

“New York City joins Hawai’i, San Francisco, Los Angeles and Nevada, which have already opened offices or hired representatives in China. Such individual arrangements are necessary because China has not awarded the U.S. “approved destination status,” a designation that would facilitate group travel to the U.S. and allow tourism advertising directly to the Chinese public..”

“With the number of Chinese traveling from the mainland each year expected to nearly triple to 100 million people by 2020 — and with China’s growing middle class increasingly able to afford the trip..”

“The representation in Shanghai is meant in part to help position the city for an anticipated agreement between U.S. officials and the Communist nation that would further ease Chinese travel to the United States, Fertitta said.”

Here are my thoughts and opinions on this.  China joined the WTO (World Trade Organiztion) in 2001.  What this means, essentially, is that China raised it’s hand and said to the world, we want to be a major economic player in the world market and play fairly.  By agreeing to the rules of the WTO, it allows China to begin to open up to the world with goods and services and allows companies to have more in-roads to the Chinese markets with less risk, esp. labor.  The Internet, email, fiber optics, etc. have made barriers of working with other countries far less.  China has always been protective and more inward focusing. We have begun to see the transformation of a China in change.  With the drive to become a major economic player, we will probably see less censoring and a slow movement to a more open society. (China allows citizens access to Google, but in a censored format) 

With this in mind, as this begins to happen, we will see such changes as the easing of the restrictions on tourist visas for travel to the US, which is part of the reason we see what is going on in the article mentioned (New York Joins Hawaii In China Tourism Deal).  If tourist restrictions are eased, we will see many more vacationers from China, coming to Hawaii (US in general) which brings more buyers of real estate to a very stable, secure marketplace (US).  Hawaii becomes attractive, because it is a part of the US that is closest to China and is “Paradise”.  Meaning, it is closer to China, for ease of travel, is in the US (Stable Investment), and offers an investment they can come and use while also receiving the benefits of the stability.   Add to it the Japanese market recovery and it makes for a promising outlook in the future.

So, when you read the article about Hawaii home prices appear to be leveling out and will start to appreciate slowly, combined with the fact that most of the real estate news the past year and a half has been bad news, and interest rates are still extremely low (started rising), it would appear now is a good time to buy, to position yourself for the next market cycle.  Again,…what is that saying, “Buy on bad news, sell on Good news.” 

Lets take a look at another example.  this goes back to The Next Hawaii Real Estate Boom .  If economist figure we could see a double in our median home/condo price in 10 years, we will work with conservative figures from this:

You buy a condo for $400,000 with 20% down-payment ($80,000) and mortgage the rest.  You breakeven on the cost to rent the unit (income minus Debt obligation and rental costs).  The market appreciates 50%, (not 100% as mentioned in the above post) and your unit is worth $600,000.  Your $80,000 investment gets a 250% ROI over 10 years.  That averages out to $20,000 a year, or 25%.  This is a very simplified breakdown, and doesn’t take into consideration: taxes, time value of money, IRR, etc. but, it is designed to show you the potential.   

So my thoughts are: now is the best time to buy b/c the market has pulled back, a recovery looks to be in the works, interest rates are still very low, and the future potential is rediculously good. (If you hold long term)  Any thoughts?

Please keep in mind these are my opinions about the market and you should do your own research to determine your best investing or real estate purchasing strategy.

There are warnings that Japan’s economic recovery could cause a bout of inflation. The good news I get out of this article is two-fold.  For one, the economy will grow 2.2 percent in 2007, the fastest since 1996, the MOF estimates, and most likely the beginning signs of good things to come in Japan, as Japan’s Baby-Boomers lag US Baby-Boomers by roughly 10 years.  Are we starting to see the beginning stages of what will lead to our next real estate market push in Hawaii?

Secondly, Japan’s low rates are encouraging companies to refurbish factories and add capacity, fueling wage growth and inflation. Business investment surged 13.6 percent to a record in the first quarter from a year earlier, the Finance Ministry said on June 3. The jobless rate fell to 3.8 percent in April, the lowest level since 1998.

Refurbishing factories, adding capacity, and business investment is an indication of economic growth to come.  Obviously the effects don’t happen overnight.  Let’s see how this one plays out with regard to Hawaii.  To read more on this read, The next big market boom for Oahu?  Also Manufacturing News Is Good. Any thoughts?