China's White Hot Economy Is Starting To Cool Down - There Just Aren't Enough People

China may have 1.3bn people...but that’s not enough. They need more.

Let me explain why...

And let me tell you why China’s population crunch could mean a massive profit opportunity for us...

China’s white hot economy is starting to cool down. In fact, the latest figures show that it has just grown at the slowest pace in five years.

Now you may be wondering what on earth that has to do with you on a day when Mervyn King tells us that Britain is heading for recession...

But this is something is going to hit all of us. Because China's economy is now the biggest contributor to global growth.

So you imagine that the thought of a slowdown there is making a lot of analysts nervous...

With Europe and the US probably already in recession, the last thing that investors want to hear about right now is a slow down in the world’s main economic engine...

The country’s economy grew by 9% in the third quarter from a year earlier. And that’s quite a bit slower than the 10.1% gain in the previous quarter.

But I don’t think this is anything to worry about. In fact, it could work to our advantage...

You see China’s slowdown isn’t just interesting to me as another economic point. As an investor, what I am interested in is how we could actually profit from this.

And I have recently shown members of my Profit Hunter investment service one specific investment opportunity that looks set to benefit handsomely from China’s slowdown.

I will come back to that opportunity in a bit. But first let’s just take a look at what’s really going on in China.

China’s economy is in the middle of a painful transition

As I have been explaining to readers of my Profit Hunter service, the crisis that we are now seeing in the global financial system is part of a much bigger change in the global economic picture.

We have seen a massive shift in economic power towards the developing economies in the last two decades. Particularly towards Asia. And the global financial system is now adjusting itself to that new economic reality.

One result of that is that we are all going to have to tighten our belts here in the UK as the economy starts to slow down. Out in China though, the problem is very different. The country has been struggling to deal with an economy that has been growing too quickly.

At least part of China’s slowdown is a result of deliberate government policies. The Chinese government has been trying to slowdown its overheating economy for the last two years. But it hasn’t had much success.

Now the combined effect of the global economic slowdown and government policies are finally starting to have an effect.

The financial press had lots of stories about China’s "slowdown" yesterday. But this really isn’t all that big a deal. An annual 9.9% is the same level of growth that China had in 2005. And it is still a lot faster than the 7.4% that the economy was growing at the start of the decade.

For many families, the most obvious example of China’s manufacturing might is its complete domination of the toy manufacturing sector. I can’t think of the last time I looked at a toy that wasn’t made in China.

So here is a fact that is going to come as a surprise to most people. About half of China's toymakers have shut down this year. And there may be plenty more pain to come...

There are now about 70,000 Hong Kong-owned businesses in the Pearl River Delta. A quarter of those could go bust according to the Federation of Hong Kong Industries estimated yesterday.

And a report by Swiss merchant bank Credit Suisse in May predicts that a third of the manufacturers in Guangdong province will be closed in three years as they relocate to surrounding Asian countries. That is huge news, because Guangdong alone produces almost one-third of China's exports.

All of that that drives home a point that I have been making to readers of my Profit Hunter service: China is fast losing its ability to compete on the lower end of the manufacturing industry.

The country could soon face a labour shortage

A big part of that is because of the fast rise in labour costs. Let’s just look Dongguan city, China's largest manufacturing centre. The average monthly pay here was 1,284 yuan in 2001. It had doubled to 2,594 yuan by December 2006. If that isn’t bad enough, China is also facing an increasing shortage of labour. The popular myth that the country has an almost unlimited pool untapped labour in the rural hinterland is just that. A myth.

Economic studies suggest that 70% of rural workers under the age of 40 are already in the cities or have other non-agricultural jobs. And you can’t realistically expect everyone of working age to abandon the farms and move to factories. As unbelievable as it may sound the world’s most populous country now faces a labour shortage.

China simply can’t keep growing by throwing cheap labour at its manufacturing industries for much longer.

The country is facing its own painful economic transition. To keep competing globally, China is increasing its production of higher- value goods. It exported about $47.6 billion of high-tech products last year - computer chips, electronic gadgets, automobiles. These now make-up 28.5% of total exports. And the speed at which high-tech exports are growing has been phenomenal. They’re up by 412% since 2002.

This isn’t good news for the developed economies. They’re going to face a much stronger challenge from China in the areas in which they still have an advantage over the next few years.

Vietnam looks set to be the big winner from this shift

At the same time manufacturers at the lower end of the scale are now actively looking for cheaper alternative locations. That is going to become even more important as the global economy slows down over the next year.

One of the big winners from this shift is going to be Vietnam. This country is quite simply my favourite Asian economy. The country has a clear cost advantage over China. Vietnam's labourers earn an average of $104 a month. That’s 41% less than what China's lowest-paid workers in the central province of Jiangxi make.

Vietnam also joined the World Trade Organization in 2007. And that has given them greater access to world markets. So last year, PricewaterhouseCoopers ranked Vietnam as the most competitive destination for manufacturing businesses among the world's top 20 emerging markets. China came second.

And Vietnam is right on China’s doorstep. That makes it a prime candidate for companies looking to relocate within the region. And it’s not just international companies that see better value in Vietnam. Even Chinese manufacturers are considering relocating to stay competitive!

South East Asia’s newest "tiger economy" is already pulling in huge amounts of money. Vietnam received US$40.1 billion in pledged investment in 2007. That’s up by a massive 354% from five years ago. And so far this year the country has received US$57.1 billion in investment pledges. That’s a 181.3% increase over all of 2007. And total FDI commitments for the year are expected to reach US$60 billion.

Of that, only about $9-10 billion has already been disbursed this year. So you can see the scale of what is still to come as the rest of that investment materialises. The IMF predicts that the country’s economy will grow 7.3% this year. And it should pick-up speed over the next five years.

And we have found a way to play this...

Given the sort of investment that the country is pulling-in, Vietnam remains the most exciting growth story in Asia. And this is the right time to buy in.

You see, Vietnam’s markets were among the biggest fallers as global markets sold-off this year. They have been rebounding recently, but there is still a lot of lost ground to be made up. I believe that we will keep seeing that happen, given how strongly the economy is growing. And that should mean huge potential gains for investors who get in before the rebound.

Now there isn’t really enough space to go into the whole Vietnam story and why I think this is such a brilliant investment opportunity here in today’s FSD. But I have written a short separate report that you can take a look for free on our website by clicking here,

And, if you are interested, it will also show you exactly how you can buy into this opportunity.

Click here to read your free report on the Vietnam investment opportunity.

Until tomorrow,

Manraaj Singh
For Fleet Street Daily

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Shares recommended by Profit Hunter may be small company shares. These can be relatively illiquid and hard to trade making them riskier than other investments. Some shares recommended may be denominated in a currency other than sterling. The return from these may increase or decrease as a result of currency fluctuations. Always seek personal advice if you are unsure about the suitability of any investment.

Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.

Profit Hunter is issued by Fleet Street Publications Ltd.

The Daily Reckoning — After the Boom, the Bust

Not much time to write this morning; we’re on our way up to the Andes to check on our cattle and our cabbages. If things get really bad, we may have to live off the fat of the land up there. Trouble is, there’s not much fat on that land.

More on that... and why the UK’s economy is doomed (and how you can protect your self as the pound sterling continues to crumble)... below...

(By the way... we’ll be out of email range for the next few days... will write again on Monday.)

In the meantime, let’s keep it simple.

After a big boom, you get a big bust. That’s what we are seeing now.

And there is no evidence anywhere in the historical record that the financial authorities can stop it. They can hold it off — for a while. They can distort it. They can possibly divert it. They can make it worse. But there is no evidence that they can make it better.

Losses are losses. Mistakes are mistakes. They don’t go away when government throws money at them. They can be moved around... shifted from the people who deserve them to, say, the innocent householder. But somehow... some time... someone has to write them off and work them out. That’s the basic plot of almost every financial story you read in the paper and see on the news every day — the de-leveraging... the unwinding... the downscaling of the world economy...

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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China's White Hot Economy Is Starting To Cool Down - There Just Aren't Enough People

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