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Two Factors Can Aid China's Growth

|Includes: iShares China Large-Cap ETF (FXI), GXC

While I agree with many that China has got a tough job dealing with their export-oriented economy being so depending on goods consumption in the United States and in the rest of the world...

...There are two things that may very well positively charge the dynamic and allow for the kind of transition that Japan and other Asian "tiger" economies will not be able to imitate: cheap, widespread transportation to open up development of the interior, and a possible population boom. Yes, I may sound somewhat cynical, but hear me out.

China's infrastructure stimulus spending will greatly help ease their transportation issues.

China currently runs 30% of the world's rail traffic on 6% of the world's tracks. But things are changing. For example, rail transport example: Currently it's about US$49 for economy hard seats for the 2,500 mile trip from Beijing to Llasa, China continues to open up their vast western frontier to settlement and development like we opened the West in the Age of Rail in the late 19th century.

With shipping costs easier, cheaper, quicker, and more ubiquitous, factories and farms will move out to the countryside to take advantage of drastically lower wages and capital costs (land, buildings, etc.) to produce even cheaper goods for both domestic consumption and export.

In effect, China's interior can become its own Vietnam (rather than losing factories and factory jobs to a cheaper Vietnam) while the coastal regions grow as rising middle class business centers - both supported by the current and future inflows of raw materials that China is currently locking up through loans to oil and metals producers, etc.

Secondly, with the one-child policy currently in effect, China knows it has a huge demographic crisis on its hands. The population is trending towards aging and trending towards males.

One way to address both the looming demographic crisis and economic growth slow-down would be to relax the policy to allow two or three children per family. A sudden population boom may very well kick off decades of surging goods and services demand just as the Baby Boomers did, beginning with the 1950s here in the U.S. Surging demand will lead to expectations of future prosperity, will lead to more growth.

Sure the coastal areas are over-crowded. But China has room for them in the remote, vast, and less-populated Western and Northern regions. The government long ago started luring members of the Han majority into those regions, giving them the best jobs and settling them in, while marginalizing the outnumbered Muslim and Tibetan and other minorities. Their infrastructure efforts will make the remote areas much more accessible not just for re-locating factories, but for re-locating families.

(Aside: Okay, so we can house them. But how to feed them? The same way it's currently being done. Right now, countries like Japan import far more food than it can grow. A prosperous, growing China will do the same. Agricultural products go to the highest bidder, leaving even the producers and the poor hungry. In the future, with both open market purchasing power and judicious cultivation of land-use covenants with Third World governments, that food it will increasingly go to China.)

Disclosure: No positions in any ETFs mentioned in or tagged for this article. This article cross-posted in another journal of mine.