China is the largest country in Asia both in terms of its population and economic size. Because of this, you would probably guess a website called “InvestAsian” recommends that our readers invest in China.
We don’t though.
Most of the opportunities have since come and gone. This is despite the nation’s staggering growth of over 500% since 1980.
Don’t get me wrong. That doesn’t mean you can’t make money in China. But increased difficulties for foreign businesses, relative lack of competitiveness, and demographic reality will make it a lot harder.
Multinationals are already starting to leave. They see the writing on the wall, along with much better options elsewhere in Asia.
Would you like to see the same clues? Here are several reasons not to invest in China.
China will age quickly in the coming decades – and their infamous one-child policy is to blame.
Rapid population growth strained the Chinese economy around the end of the 20th century. Starting in 1979, the communist party only allowed couples to have one child because of this. The one-child policy officially ended in 2016.
However, the policy has ugly consequences which will reveal themselves soon.
Every two people in a society must, on average, have two children to reach the population replacement rate. But those who gave birth under the one child policy are starting to grow old and die. China now has an entire generation of parents who outnumber their children 2 to 1.
The result will be an older population, inefficient workforce, and greater need for a welfare state. All of these things are horrible for economic growth.
Japan has similar problems which resulted in over two decades of stagnation. But the difference is that China won’t become a developed market before having to tackle these issues. It’ll be the first country which grows old before it can grow wealthy.
Furthermore, and as a direct result of an older society, China’s population will start to shrink around the year 2030. It will lead the nation to weaker growth and declining influence for the foreseeable future.
It will take time for all this to impact the country’s economy. Long-term investors should take China’s future problems into consideration though.
The population of China is expected to peak at 1.45 billion around the year 2030.
Rising Cost of Labor
“Made in China” is often synonymous with cheap products. However, the truth is that labor and manufacturing costs aren’t the bargains they once were.
A report by Oxford Economics found that labor costs in China are only 4% less expensive than in the United States. That’s unadjusted for other factors such as cost of shipping, upkeep, and taxes.
China has grown because of its manufacturing industry. But manufacturing can only take an economy so far. A country must educate its workforce, diversify into the services sector, and create more value in order to grow past the middle income trap.
So far, China has failed to do this. Manufacturers and other firms are now leaving for this reason. They’re headed to nearby competitors such as Vietnam where costs are cheaper, taxes are lower, and running a business is more straightforward.
This doesn’t just speak to the cost of doing business in China. It also shows the lack of faith investors now have in the country compared to its neighbors.
I look at smart money fleeing and see a warning about China’s future.
It’s Hard to Invest in China
Doing business, living, and investing in China just isn’t easy. The government makes things too difficult for foreigners. Here’s some examples.
Long-term visas are a pain to get. You’ll need to form a company and make an investment of either US$500,000 in China’s undeveloped west, US$1,000,000 in the central provinces, or US$2,000,000 in any region to get a Chinese investment visa.
In addition, you’ll have to get a medical certificate, criminal record check, proof of personal tax payment, and tons of corporate documents such as an annual inspection and asset valuation report.
Foreigners (and locals) cannot own freehold property in China. All land belongs to the state and can only be obtained on a 70-year leasehold at maximum. As such, real estate investors need to look elsewhere.
Stock investors also face restrictions. Foreigners can only buy “A-Shares” via Hong Kong. You’ll need to open a Hong Kong brokerage account to do so. Either that, or you can buy stocks in China which are listed on US exchanges. There’s limited opportunities either way.
With all of the bureaucracy and nonsense listed above, why would you ever want to live and invest in China?
More Opportunity Elsewhere
Perhaps the most important reason you shouldn’t invest in China is because there’s a plethora of better options nearby. Why make things needlessly difficult for yourself?
Cambodia and the Philippines are both growing faster, for example. They’ll each give you a long-term visa with little hassle. Neither of them have demographic problems. Foreigners can own property in both countries as well.
Quite simply, there’s an opportunity cost to investing in China. You’d be doing so at the expense of not investing in places with faster growth, less bureaucracy, and more opportunities.
Asia is the most diverse region on the planet. Don’t just go where everyone else is. The best places to invest are rarely the most talked-about.
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