3 Ways The Chinese Slowdown Will Impact You


Global financial markets are bouncing around like a Mexican jumping bean, driven in large part by China’s popping stock market bubble. And while it’s fun to talk about China’s equity boom and bust, the real story to focus on has nothing to do with the Chinese stock market and everything to do with the Chinese economy.


As economic growth slowed between 2011 and 2014, the People’s Bank of China (PBOC) increased its efforts to stimulate the economy. With the GDP growth rates consistently falling, and the stock market stagnating, Chinese leaders started cutting rates in late 2014 to stimulate the economy. They also lowered reserve requirements for banks and eased restrictions to promote additional liquidity. Although the economic impact is unclear, one thing was certain: Chinese equity markets took off, rising more than 50% between January and June of this year.

Along the way, domestic interest in the stock market grew by leaps and bounds. By April, Chinese speculators were opening more than 4 million new brokerage accounts per week. And data from the China Household Finance Survey revealed that the average investor fueling the rally was a high-school drop out.

Many Chinese speculators were betting on a flood of price-insensitive foreign buyers after the country’s stock market became a part of the much-followed MSCI global emerging markets index.   And so when MSCI chose not to include Chinese stocks in the emerging market benchmark, the bubble popped.

The PBOC immediately sprung to action. It eliminated loan ratio caps, provided liquidity support for margin finance, lowered interest rates, and even devalued the Chinese currency. The China Securities Regulatory Commission also joined in with a de facto ban on short selling, adding to it’s prior 6-month ban on any selling by major shareholders. Even the press was told to avoid reporting on financial panic or plunging prices.

The blunt reality is that China is slowing, and this will have global implications.

But all of the focus on Chinese markets is distracting us from focusing on the more important underlying development: the blunt reality is that China is slowing, and this will have global implications. China’s credit-fueled investment-driven economic growth engine is kaput. Its consumption engine has not generated enough momentum to matter (yet).

The slowdown matters for many reasons. I’ll highlight three to illustrate the breadth of the impact. First, China grew to be the world’s most important consumer of iron ore, lead, steel, zinc, copper, and many other industrial or investment commodities. A slowdown in Chinese economic growth implies a slowdown in demand growth for these commodities. That likely means lower prices (a deflationary shock) for these and other commodities that China has been voraciously consuming.

Deflationary pressures imply that interest rates will stay lower for longer. Even if the US Fed begins to raise interest rates this year, any increase is likely to be nominal and probably won’t have any material impact. While I can’t comment on what your credit card company will do, I suspect banks will continue to offer mortgages at historically low rates and you’ll continue to get very little return on money you leave at the bank. Don’t let your banker force you into an early refinancing with suggestions of rapidly rising rates!


Second, a slowing China may mean lower prices (or at least lower competition!) for that Louis Vuitton bag that you’ve been eyeing. That’s right. Less prosperity in China means fewer purchases of fancy goods. Further, the devaluation of the Chinese yuan makes the bag more expensive to Chinese buyers, and given that more than 25% of Louis Vuitton’s sales are from non-Japan Asia, it seems safe to bet the company will be seeking buyers anywhere and everywhere they can. Not a fan of LV bags? No worries. Greater China accounts for around 30% of sales at Burberry, roughly 20% at Prada, and as much as 35% at Harry Winston, Omega, and Balmain. And by the way, these numbers likely underestimate the Chinese impact as they don’t capture Chinese purchase of luxury goods while traveling overseas.

Third, don’t fool yourself into thinking your portfolio is immune. The world is simply too interconnected for Chinese growth rates to not affect the earnings of companies in your mutual funds and retirement accounts. Many of America’s leading multinationals generate significant revenues and profits from China and Asia. And even those companies that appear relatively immune from the Chinese economy (think Verizon, for instance) may find their stock prices moving in sympathy… as investment managers find themselves selling strong companies to keep their portfolios balanced.

Net net, what happens in China won’t stay in China.


Is Apple Doomed To Diappoint? Will it Matter?


Last Sunday afternoon, I was returning from a family camping trip to Maine and encountered what can only be described as blood-curdling hideous traffic. My children, who had spent much of the day in the sun, were exhausted and…to put it mildly, cranky.  Fortunately, I had two iPads charged up and loaded with some of their favorite movies. All would be fine…

Except one of the iPads failed to play any of the movies! I pulled over. I Googled the problem. I called friends.  I prayed.  No luck… Needless to say, the rest of the trip was tough. After two bathroom breaks, one stop for drinks, another stop for ice cream, and 180 painful minutes of total transit time for the 75-mile journey, we successfully arrived home in tact. Irrational as it was, I directed my frustration at Apple.

That evening, I logged on to book an appointment at the local Apple Store to meet with a Genius.  No dice.  The next available appointment was almost a week away. Hmm, that’s odd. I’ve had technical issues before but they usually can accommodate a visit to the Genius Bar within a day or two. Was this a sign of Apple’s success as its customer ranks swelled? Or perhaps an indication of diminishing product quality? I couldn’t tell, and frankly, didn’t care.


The next morning at 1001am (the store opened at ten o’clock), I walked into a relatively empty store that had about 20 staff on duty. Greeted at the door by a friendly face to whom I explained the problem, I was rapidly directed to another person who was taking same-day Genius Bar appointments.

I waited in line for 10 minutes behind other irate customers, only to be told “It will take 90 minutes or so to see a Genius.” While waiting, I had my first and only positive surprise of the whole experience. Someone came and got me after about 20 minutes. Hurray!

The “genius” who tried to help was anything but. He was overconfident, condescending, and entitled.  At one point while he had nothing to do, I asked him if he could check my iPhone to see why it was having trouble holding its charge. “You’ll need to get in line for another appointment.” Here I was sitting in front of him, he had nothing to do, I had nothing to do, I had a problem, he may have had an answer, but he wouldn’t help.

A typical bureaucratic reaction given the size to which Apple had grown?  Possibly.  About a decade ago, I wrote my dissertation about the tradeoff between scale and differentiation and this seemed to be a perfect case in point. As Apple grew, it was losing the magic touch of making a customer feel special. I felt like a number in a system, whereas five years ago I remember a very different retail experience.  The blunt reality is that I know I am a number... I just don't like being made to feel like one.

Oh well, it’s ok, I had plenty of iPad-related questions. “The HD movies I own take up a ton of space on an iPad. How can I download SD versions to maximize the number of movies I can fit on the iPad?”

I was met with a blank stare, so I asked again. He responded with “Are you asking me if you can download something you didn’t buy?” He then answers bluntly, “No, you can’t do that. If you bought HD, you can only download HD…I’m certain.” Certain?!?  That’s a bold statement, I thought.  He reiterated: “Absolutely certain.”

Next question: “It’s frustrating for my children to see all the videos I’ve purchased on the iPad. Is it possible for them to just see the ones that are on the device?” He pauses, thinks, seems to search online for something, and comes back with “Nope. All iTunes purchases are stored in the cloud and they all show up in the videos section so you can download them. There is no way to do what you want.” I explained to him that friends of mine managed to do it… to which he rapidly replied, “Well, maybe you should ask them.”

Needless to say, I stopped asking for help. Instead, I called my friends and spent 10 minutes fiddling to figure out how to do what he said wasn’t doable (FYI: I succeeded!).   I then asked another employee about downloading SD versions of HD movies. She spent somewhere between 25 and 35 seconds showing me how to do it. Very easy once explained, and absolutely doable!


The one thing my “genius” actually did do was to determine the iPad I had wasn’t working.  Resetting it to factory settings was the only action that would work (so he claimed); after he deleted and reset the iPad, I spent several hours reinstalling apps and downloading videos.  It's totally unclear to me if any of this was actually necessary.

All in all, the whole interaction was beyond distasteful. It also got me wondering, has Apple simply been too successful to maintain the quality experience its customers have come to expect?  Are they able to scale and also stay differentiated?

As for my specific experience, it’s just one data-point, I admit. Maybe I just drew a bad apple? But perhaps my data-point is an indicator of a worm within the apple…silently eating away at the differentiated experience that typifies Apple. The thing is, success often sows the seeds of failure. Wall Street demands growth, employees demand growth, and after years of growth, the law of large numbers presents a formidable challenge.

While it's possible my experience was completely anomalous and the Apple machine still works perfectly, it might also be possible that my Genius Bar experience is an early warning sign of greater issues forthcoming. Having a dedicated group of Apple zealots working at the Genius Bar is a strategy that simply won’t scale. New recruits are less likely than prior generations to be as passionate about the brand and are potentially less knowledgeable, quite possibly turning the Genius Bar from a source of advantage into a vulnerability.


I’m beginning to hedge my bets: I recently bought an Amazon Kindle Fire and have been pleasantly surprised.  But I also purchased an Apple Watch.

I continue to be a fan of Apple products (I recently purchased an Apple Watch)…in no small part because the entire Apple ecosystem effectively “locks” you in through seamless integration, ease of use, etc.  It's really nice to have my content synced across my phone, laptop, iPad and even TV, for instance.  It's also hard to find a better system (at this point).  But the high expectations built into the cult of Apple seem destined to disappoint. The question is: Will it matter?

When the Going Gets Tough, The Tough Devalue


The "vicious vacation volatility" I mentioned in my last newsletter (click HERE for an archive) seems to be rearing its ugly head, driven in large part by China's surprise announcement that they would devalue the yuan.  As an avid student of financial market and Chinese history, I have often cited a Chinese devaluation as a meaningful risk if the economy slowed enough.  Why's that?  Because in early 1994, the Chinese pulled a similar move in which they significantly devalued their currency.

Much has been made of the possible ramifications of the Chinese currency moves, with speculation of global contagion as a negative and a more flexible currency regime as a positive.  As I have previously discussed (click HERE), I strongly believe China's 1994 devaluation was a major contributor to the Asian Financial Crisis.  How?  By improving the competitiveness of Chinese exports, the devaluation effectively made exports from southeast Asia more expensive and therefore less desirable.  Might a similar set of dominoes fall again this time?   I was in Singapore when the Chinese currency moves happened and the chatter seemed disproportionately focused on possible currency wars in which competitive devaluation gets increasingly intense.  Definitely something to watch.

In other news that's caught my attention, Canada seems to be cracking.  I've noticed renewed interest in my earlier post regarding the forthcoming Canadian consumer recession (click HERE) and have had lots of media inquiries on the topic -- a telling indicator that people are noticing Canada's precarious economic condition.  One of Canada's leading home finance companies, Home Capital Group, may exemplify the situation.  During a conference call with investors last month (click HERE), management noted mortgage origination volumes were plunging.  Uh Oh!  Stay tuned...we've seen this movie before...

I'll continue to comment on developments I find interesting and noteworthy.  In addition to posting my thoughts every Wednesday on my website, I have also begun posting them to LinkedIn, Facebook, and Twitter.  Listed below are links to my most recent comments.  As always, I'd appreciate feedback!

Sizzling Saigon: Middle Class Boom Forthcoming

During a recent trip to Asia, I had an opportunity to spend three days in Ho Chi Minh City, formerly known as Saigon.  While there, I saw firsthand the amazing economic activity that accompanies a emerging middle class which has newfound discretionary income.  Everywhere from restaurants to shops to airports. consumption was alive and well.   Click HERE for my more detailed story.


Singapore's Secret Sauce: Humble Leadership?

I had the good fortune to be in Singapore during the country's 50th birthday party last weekend.  The occasion marked tremendous reflection within the country on the origins of Singapore's success.  While many logical explanations exist, the most compelling and convincing one has to do the the country's spectacular leadership.  How much of Singapore's success can we attribute to Lee Kuan Yew?  Click HERE for my comment.


Think You're Above Average?  You're Not Alone.

In something known as the Lake Wobegon effect, most people believe they are above average.  In this comment regarding this phenomenon, I suggest it may not be that bad for us to be (over)confident as it inspires action and risk-taking greater than might otherwise happen.  But self-awareness can't be bad either.  Click HERE for my thoughts.


Trans-Pacific Partnership

The Trans-Pacific Partnership (TPP) might emerge to be the most important trade development of our time in which countries representing more than 40% of global GDP reduce barriers to exports and imports.  Many commentators noted that China was specifically excluded from the TPP, but in this short comment, I question that assumption.  Maybe they didn't want to join?  Click HERE for my piece.


The Iran Nuclear Deal & You

If economic sanctions on Iran were removed (an admittedly big "if"), how would it impact the global economy?  Five possible developments include a plunge in oil prices, a boom in global supplies of pistachios, greater availability of saffron, an economic boost for Dubai, and a flood of outbound Iranian students and patients.  Click HERE for more.


Creepy Cyber Coincidence?  Probably Not.

On July 8, the websites of United Airlines, the Wall Street Journal, and the New York Stock Exchange all experienced disruptions that were dismissed by authorities as mere technical malfunctions.  I simply didn't believe it and in this short comment, reflect on why I think there may have been a more malicious driver to these seemingly coincidental developments.  Click HERE to read my note.


Sometimes It's Best to Do Nothing

Many of us use level of activity as a proxy for the degree to which an employee is busy or working hard.  Using a story from my Business Ethics class at Yale, I suggest perhaps it's sometimes best to do nothing.  Click HERE for the piece I wrote.

Sizzling Saigon: Here Comes The Middle Class!



I just returned from a trip to Ho Chi Minh City (Saigon), where I had a front-row seat to see the forthcoming global consumption boom driven by a rapidly expanding middle class. During my short trip, I had the chance to meet with business and government leaders, local and foreign investors, artists, farmers, and several taxi drivers. I ate at a restaurant that made NYC look cheap, with Vietnamese who regularly spend six figures on custom-designed jewelry featuring imported gemstones. Inequality was palpable in almost every walk of life, even if the tide appeared to be lifting all boats. There were also contradictions galore. An attendant at a roadside noodle stand beamed a broader smile than I’ve ever seen after receiving my tip of less than $1.

But one thing was absolutely certain: consumption is booming. The middle class is using its newfound income to emulate a Western lifestyle.

Restaurants and cafes are increasingly common and multinational corporations are noticing. Consider McDonald's. The company recently entered the country and today has 5 restaurants in Saigon. In some of these early locations, volumes are running 30%+ above even the most optimistic scenario. Many middle class Vietnamese families now have their Sunday dinner under the golden arches. The market is so under-penetrated that it wouldn’t surprise me if McDonald's had a thousand restaurants in Vietnam by 2025.


Food is not the only item chewing up (pardon the pun) the newfound incomes of the Vietnamese middle class. Housing is another focus. After spending several hours navigating the streets of Saigon on scooter with a local friend, who has lived in Vietnam for ~10 years, he took me a former colleague’s home. The young man we met described himself as a “farmer” (he was an executive at Vietnam’s largest shrimp farming company), and while he was humble, intelligent, and insightful, I was distracted by the surroundings. We met in the courtyard of his apartment building, as modern and comfortable as the nicest developments in the United States. The pool was filled with middle class Vietnamese…and although I looked hard, I failed to notice a single non-Vietnamese ex-pat.


Later that evening, I had dinner with my friend and his wife at Sorae, a top-notch sushi restaurant, located atop one of the city’s tallest towers. Beyond the budget of most Vietnamese, I expected a foreign crowd. But no, the place was filled with locals. Many were entrepreneurs educated abroad; most were in the city to pursue what they felt were unparalleled economic opportunities. Twenty-five floors below us on the streets, families were heading out to dinner; traffic, overwhelming; restaurants, packed; bars, full; stores, crowded. In general, Saigon was sizzling. All around, it sure seemed to me that a middle class was in the making.




Singapore’s Secret Sauce: Humble Leadership?


The Republic of Singapore was born on August 9, 1965 when it officially separated from Malaysia. The nation turns 50 this weekend.  The island nation with a population of slightly more than 5 million and land area of less than 300 square miles (making it about 1/8 the size of Delaware) has been among the world’s most successful development stories.


Singapore boasts one of the world’s most successful economies by many metrics. It has averaged ~7% annual growth since the 1970s, has the third-highest GDP per capita in the world, and ranks second in global competitiveness according to the World Economic Forum (ahead of the United States!).  Income per capita rose from ~$500 at its founding to over $50,000 today.  It has been touted as the main alternative to democratic capitalism and serves as a role-model for many emerging countries.

But to think Singapore's success can be easily emulated elsewhere would be foolish -- if not dangerous.  Some of the ingredients used in the Singaporean recipe may not be particularly useful in India or China, countries with populations more than 250 times larger than Singapore.  Likewise, not all nations are can be located at a major intersection of global trade routes.  But most nations can benefit from a deeper commitment to rule of law and liberal, open, anti-protectionist trade and investment policies.

So what lessons can we learn (and NOT learn) from Singapore's stunning success?

First, Singapore demonstrates that "workfare" is better than welfare.  Singapore has demonstrated the power of developing safety nets that emphasize self-reliance and inter-generational equity.  This has proven remarkably effective at securing jobs.  Singapore currently boasts an astounding unemployment rate of 1.9%. This is in part due to its philosophy that work is the best form of social assistance. To support this system, Singapore has forced savings - employees under the age of 50 are required to set aside 20% of their wages and employers must contribute an additional 16%, placed into accounts that address specific needs such as healthcare (7% of the 36% total goes towards this), helping Singaporeans budget for their own healthcare needs.  By having each generation pay its own bills, the risk of long-term instability arising from an unsustainable pension system is mitigated.

Second, higher pay for public servants lowers corruption.  Singapore's Prime Minister Lee Hsien Loong made $2.4 million in 2012 (in comparison, President Obama's salary of $400,000 is 17% of that!). This is a result of Singaporean founder Lee Kuan Yew’s 1994 policy that pegged the salaries of top government officials to what they would earn at the top of the private sector.  Although there have been cuts since then, the pay often attracts the “best and the brightest” – and may serve as a possible way to deter politicians from personally skimming contracts for personal benefit.

But some of the points highlighted as key ingredients of Singaporean success have limited relevance outside of the city state.

For instance, the fact that autocratic control facilitated rapid development in Singapore is by no means an endorsement that dictatorships are the way to go.  Lee Kuan Yew’s initial reasoning of creating a dictatorship was that since Singapore was composed of so many fractured immigrant groups, if democracy was implemented, everyone would just vote by ethnic group.   But the reality is that Singapore may have just been lucky in getting an informed, enlightened, and magnanimous dictator.   Assuming dictators are the way to rapid advancement over long periods of time may be naive.

Or what about public housing?   Singapore is one of the only countries in the world with almost-universal affordable housing, despite land constraints. Over 80% of the population lives in public housing and 90% of Singaporeans own their own homes.  One of Lee Kuan Yew's basic beliefs was that a society that had something to lose would be more willing to defend itself, preserve itself, and work hard to promote itself.  However, this model may be unrealistic for larger countries. Simply housing a quarter of India’s population would require 312.5 million dwellings, and a quarter of China’s population is almost 340 million people!  Singapore itself, with a population .04% of that of China’s, is even now struggling to keep pace with its recent population increase.  Singaporean-style public housing may not be scalable.

And as for education policy, the country's policies seem to be working: Singaporeans consistently score in the top percentiles worldwide in math and science tests.  Singapore’s education system has also been widely praised for its focus on teacher quality and development. Despite these positives, Singapore’s education does not consistently provide students a broad worldview. Singaporeans themselves have referred to it as the “creativity crisis.”  And despite recent efforts by Singapore to adopt less siloed approaches to education, such as YaleNUSCollege, the first full-time residential liberal arts college in Asia, Singapore still has a long way to go.  Singapore's education policy may have helped it get to where it is, but it may not prove useful to get it where it wants to go.  It needs to move beyond early specialization and towards a more even weighting between breadth and depth.

 Singapore's success may be attributable to a humble, open-minded, empathetic, and enlightened leadership that genuinely cared about the population, its well-being, and its future prospects.

Ultimately, Singapore's successful transformation from swamp to modern economy may not have been about workfare, civil service pay, housing policies, or education systems.  In fact, it may simply have been that the leaders of the country were humble and empathetic with the people they represented.  They truly cared about the population, its well-being, and its future prospects.

Perhaps it was the race riots in the 1960s, or the humble beginnings in which Singaporeans lacked basic comforts, but the founding leaders were "more down to earth, more grounded, [and] less self-assured or arrogant."  The results speak for themselves.





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