It may be no secret that China’s economic health will have an impact on the rest of the BRICS countries in addition to America and Europe. India and China need the resources of Brazil, Russia and South Africa and those three countries prosper due to the business from India and China.
For a better understanding of the BRICS, I turned to Investopedia for a definition, which said, “The BRIC thesis posits that China and India will become the world’s dominant suppliers of manufactured goods and services, respectively, while Brazil and Russia will become similarly dominant as suppliers of raw materials.
“It is important to note that the Goldman Sachs thesis isn’t that these countries are a political alliance (like the European Union) or a formal trading association – but they have the potential to form a powerful economic bloc…”
Due to lower labor and production costs, many companies also see the BRICS as a source of foreign expansion opportunities.
In addition, what was once only an acronym has become something else.
Although the BRIC acronym came into existence in 2001 when there was no real political organization among the four original countries, on June 16, 2009, due to the 2008 global financial crises, the leaders of the four BRIC countries held their first summit in Yekaterinburg, Russia, and issued a joint declaration. Since then, they met in Brasilia in 2010 and again in Sanya, China in 2011.
In 2010, South Africa launched efforts to join the BRIC group, and the process of its formal admission began in August. Later in 2010, the BRIC countries expanded to include South Africa, becoming the BRICS.
The next meeting of the BRICS is scheduled in New Delhi, India, March 2012.
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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Because of the structure of China’s land ownership and banking system, the risk of losing money is much less than in the West and when the government resells property that lost value the first or second time around, the government banks collect another 30% to 60% down payment and also makes money off the interest of the new loans, and the property still belongs to the government—it is only leased for 70 years with an option to extend the lease.
In America, private property seldom belongs to the government. Even when the government repossesses property for any reason, it is usually sold at auction for very low prices with little to no chance to make up for what was lost.
In China, however, the government recycles the money mostly in a loop while the US government is not part of the loop—except when baling out private sector banks, and the money flows in one direction toward the private sector while adding to the national debt.
In addition, in China, Bloomberg reported in December 2011, that China’s property sector equals about 12 percent of China’s GDP and then Bloomberg goes on to discuss property values in China dropping 10, 25, 40 and even 50 percent or more—something that is still devastating the economy in America.
To learn more about property values dropping in China, I suggest reading More on Property Downturn at Patrick Chovanec’s An American Perspective from China
Chovanec wrote, “The revenue shortfall is making it hard for some cities to pay for basic services like police and hospitals, much less repay the massive amount of debt they borrowed for stimulus projects – which, according to this report from Bloomberg, may be much larger than official statistics suggest.”
However, before I move on with more about the BRICS countries, let’s not forget what caused China to borrow for stimulus projects in the first place—the 2008 global economic crises, which led to about 20 million Chinese losing jobs. Is it possible that the 2008 economic tsunami from New York is finally being felt in China?
Interestingly, Global Issues.org says, “While Europe and the US consider more socialist-like policies, such as some form of nationalization, China seems to be contemplating more capitalist ideas, such as some notion of land reform, to stimulate and develop its internal market…”
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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In China, where do you think most or all of the money from those 30% to 60% down payments mentioned in Part 2 go? For a first-time property sale, the government owned banks loan the money to private citizens or businesses to buy property owned by the government. Once the loan is complete, the down payment and the amount of the loan flows to the same or another government owned bank and then the buyers make payments with interest to the government owned bank that holds the loan.
When re-sales of these properties take place, the first mortgage on the leased property is paid off and the second loan is either 70% (for a buyer’s first home) or 40% (for a second home).
Thirty percent of property in China is bought with cash.
Due to the high required down payment, the risk to China’s government owned banks is much less than the risk in the US private sector banking system, which really has no risk, since the government often steps in to make up for the losses in the private sector while ending up increasing the national debt.
In China, even when property values drop, the bank, which the government owns, may repossess the property (that the government always owned) and resell it. This means after a property has dropped 50% of its value in China, the government may lose either 30% or 10% of the value of the loan. In the US, if a bank cannot re-sell the house at the current value, then it losses all of the value of the loan.
However, when the same property that was repossessed is sold again, the down payment will be between 30% to 60% in addition to the fact that 30% of property sold in China is bought with cash.
In the long run, will the government owned banks in China make a profit or a loss?
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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China’s banking system has undergone significant changes in the last two decades and is functioning more like western banks than before but remains owned by China’s government.
That is a significant difference. For example, in America, there are no government owned banks but the public sector insures any risk taking the private sector banks take. This means that private sector banks may lose trillions and the government will step in, as Washington D.C. did in 2008, and go deep into debt to save the banks from drowning and taking America and the West’s economies down with them into a black hole.
The biggest difference between the west and China is the money trail.
In America and the west, most people borrow from private banks to buy private property and when the value of the property drops, as it has in the United States, and the borrowers walk away letting the bank reposes a property that is worth much less than the loan amount, much of the money is gone—when the house sold, the equity went to the previous owner and any mortgage that existed was paid off. The US government made no money on the deal (property tax goes to state governments).
It doesn’t work that way in China because the banks are owned (and controlled) by the central government and so is the land. A better idea of the difference between buying private property in the west and government owned property in China comes from Global Property Guide.com that says, “The slowdown (drop in property values in China) follows market-cooling measures first introduced in April 2010. The campaign intensified in 2011. The down payment for first-time buyers’ mortgages was increased to 30% from 20%, and for second homes rose to 60% from 50%.”
By comparison, in America, down payments may be as low as no money down or 3.5% and as high as 20% depending on the loan and the qualifications of the buyer/s.
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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In 2001, Jim O’Neill, the chief economist for Goldman Sachs, coined the BRIC acronym to represent the combined economies of Brazil, Russia, India and China. He was also so bold as to predict that by 2032, or sooner, the BRIC would overtake the six largest western economies (which includes America) in terms of economic might.
Then in 2010, South Africa joined the BRIC turning that acronym into the BRICS.
In fact, the International Monetary Fund (IMF) has predicted that China, a member of BRICS, will beat the United States as the world’s largest economy by 2016 with a GDP of $19 trillion compared to $18.8 trillion for the US.
There are about seven billion people on the planet and almost half live in Brazil, Russia, India, China, and South Africa. The US, by comparison [I prefer factual comparisons over opinions], holds less than 5% of the world’s population. However, I thought I’d throw in this comparison as a footnote. The King’s College of London reported that in 2009, “More than 9.8 million people are held in penal institutions throughout the world… About 2.3 million were in the US,” which means 23% of the total global prison population was in America.
About prison slavery in the United States.
Did you pay attention? A country [the US] with less than 5% of the global population has 23% of the global prison population.
By comparison, the five BRICS countries [without the freedom American citizens seem to enjoy] has almost half of the world’s population but only 35% of the global prison population.
What does that tell us—that the more freedom and wealth a country has, the more crooks it grows and attracts?
Anyway, the world’s combined GDP, according to The World Bank was more than $63 trillion (US) in 2010. The GDP of the US was $14.6 trillion, while the BRICS’ combined GDP equaled about $11.6 trillion (US).
Recent drops of property values in China, sometimes reaching 50%, caused dire predictions in the Western media that China’s economy would soon crash and take the BRICS down with it causing their economies to suffer as well.
However, it is best to understand China’s economy and banking system to see if this wishful thinking on the part of China’s Western critics is valid.
Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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