Despite popular belief, China is no longer a cheap place to do business with labor costs and real estate costs soaring. Join Jason Hartman as he interviews Shaun Rein, author of The End of Cheap China and Managing Director of China Market Research Group in Shanghai, about debunking common myths, such as China is stealing U.S. jobs.
Many companies have begun doing business in China, due to what Shaun refers to as “capitalism on steroids.” Labor costs have increased in China to the tune of around 20 percent, and the government is trying to increase wages yearly over the next five years. Another factor affecting manufacturing costs over time is that fewer of the younger generation wants to be employed in manufacturing jobs, wanting to realize their white class dreams. China is also pushing middle class development to offset the manufacturing issue.
Shaun Rein is the Managing Director of CMR, the world’s leading strategic market intelligence firm. He is one of the world’s recognized thought leaders on strategy consulting.
He is a columnist for Forbes on Leadership, Marketing, and China and for BusinessWeek’s Asia Insight section. He is often featured in the Wall Street Journal, the Harvard Business Review, The Economist, The Financial Times, Newsweek International, Bloomberg, Time, and the New York Times. He is regularly interviewed by American Public Radio’s Marketplace and NPR.
He frequently appears to deliver commentary on CNBC’s Squawk Box, Bloomberg TV, CBS News, and CNN International TV. Before founding CMR, he was the Chief of Research for venture capital firm Inter-Asia Venture Management. He also was the Managing Director, Country Head China for e-learning software company WebCT where he also ran the company’s Taiwan and South Korean operations. He also served as the Assistant Director of the Center for East Asian Research at McGill University. He earned his Master’s degree from Harvard University focused on China’s economy and received a BA Honors from McGill University.
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JASON HARTMAN: Welcome to the Creating Wealth Show! This is episode #252, and this is your host, Jason Hartman. We’ve got a very interesting show, with an update from China, today. Actually, our guest will be talking about China, and the opportunities, and the perils, and the pitfalls of what is going on in China and the global economy. So, I think you’ll find that to be quite interesting. And it’s funny, as I was just about to record this intro, I had CNBC on—the station that is for the vast Wall Street conspiracy—I like to say. And I saw our guest on TV! On CNBC as they were reporting from China. So, kind of interesting that that just happened by synchronicity, I guess. Anyway, we’re going to do a different format on this show today, by the way. We’re going to start with our guest interview, and then I will be on after the guest interview. So don’t stop listening after our guest, and I will talk about a few issues, announcements, and articles and commentary on economics and real estate investment and personal finance. So, let’s go right to our guest now, and I’ll be back after our guest to talk to you a little bit more. Here he is!
JASON HARTMAN: My pleasure to welcome Shaun Rein! He is with China Market Research Group, and he has got some fascinating perspectives on China, on what it means to the rest of the world economy, and he’s the author of the soon to be released book, The End of Cheap China, and looking forward to having him on the show today. Shaun, how are you?
SHAUN REIN: It’s a pleasure to be here, Jason. Thank you for having me.
JASON HARTMAN: Well, my pleasure. Now, you’re in Shanghai, as an American would pronounce it? Or Shanghai?
SHAUN REIN: Yes, I’m in Shanghai, the business/financial capital of China.
JASON HARTMAN: Where it is very expensive, from what you tell us, to have an apartment or a condo, right?
SHAUN REIN: Actually, business in China is no longer cheap, so an office to rent in the central part of Shanghai is actually more expensive than a lot of places in the United States right now. And actually, my consulting firm is thinking about opening an office in the United States to save costs.
JASON HARTMAN: Now, isn’t that contrary to popular belief! So, The End of Cheap China, Shaun—what is going on there, and what are the factors that are changing the game?
SHAUN REIN: So, I decided to write this book, Jason, because I wanted to cut through a lot of the hysterity and myth that are being perpetuated in the United States about China’s rise. The first thing, you see people like Paul Krugman who say that China’s actually stealing jobs from the United States by keeping its currency, the RMB, artificially low. It just doesn’t hold up to basic scrutiny. So I wrote the book, and I looked at a couple things. The first, is that China’s no longer a cheap place to do business anymore. Labor costs and real estate costs are soaring, which is actually making it more expensive to produce in China than say, in Indonesia, or Vietnam. So, China’s really winning and outcompeting the United States for manufacturing jobs because of efficient labor pools, and really, the best world-class infrastructure in the world. And the second thing is, I just wanted to sort of give tips for American businesses and policymakers, on how to stay ahead of the curve—how to adjust and evolve to China’s rise, that they can profit from it, rather than be left behind, and sort of end up a sort of a middling country, like the United Kingdom is now.
JASON HARTMAN: It’s pretty interesting tough, Shaun, how you talk about labor costs increasing pretty dramatically in China. I think you’ve mentioned around the 20% mark, which is a huge increase. But, the floor, to start with—the bar was set so low. I mean, is it really that big a deal if wages go from a very low number of a few bucks, 10 bucks a day, something like that, to $12 a day?
SHAUN REIN: Well, you know, here’s the thing, Jason. It’s not only just that minimum wage has gone up. Last year, 21 of China’s 31 provinces increased the minimum wage on average by 22%. But the government is trying to increase wages long term. So what they’ve said, is in the next 5-year plan, that the minimum wage should go up 15% a year for the next 5 years. They’re also starting to enforce Social Security benefits a lot better. So what you see in the last two years, probably on average the typical factory cost per worker has gone up 70%. So on a 5-year period, it’s gonna be extremely expensive to do business here on manufacturing. The second thing is, Chinese younger workers just don’t want to work in factories anymore. Frankly, because of the one-child policy, as workers are tired, there are fewer young people who are willing to work in factories, because they want to realize their white collar dreams. So, even though it’s still relatively cheap to produce here than, say, in the United States or Germany, you know, you have this confluence of trends and issues that’s gonna make it extremely expensive on a worldwide basis in 5, 10 years. So, companies are going to have to adjust.
JASON HARTMAN: It’s interesting that you say the Chinese government wants to see wages go up at a rate of about 15% annually. And what kind of growth rates are they looking at? I mean, are they looking at 6-8% growth in each of those years? Of course these are goals, targets, and projections, but, that’s about double the growth rate, any way you slice it, right?
SHAUN REIN: Well, we expect GDP growth to grow about 8.4% in 2012. And we expect it to be in the 8-10% range for the next 5 years. Part of the issue is, we’re close to hitting the mid income gap in China, which is around $6000 USD. And usually when that happens, the rich get richer and the poor get poorer. The government is really trying to ensure that you don’t have a great disparity of wealth. So, they’re really trying to boost up and create the middle class. That’s where you’re going to get a more sustainable and vibrant economy, and you’re going to reduce some of the ills of the manufacturing sector, such as massive pollution that was really starting to hit the healthcare system, just the general wellbeing of everyday Chinese. They really have to push for this middle class development.
JASON HARTMAN: When we were talking just before we started the interview, and I told you about my friends there that are starting companies in China and so forth, and doing business over there, and they talk about how capitalist it is. I had Jim Rogers on the show. Of course, he’s been quoted as saying, China is far more capitalist than America, nowadays. And you said it’s—your phrase was, it’s capitalism on steroids. Tell us about that, but—you know, and I think maybe a lot of the listeners know about that, but maybe how it interplays with the fact that technically speaking, at least, China is a Communist country.
SHAUN REIN: Sure. Well, I think—I do like to say that China’s kind of like capitalism on steroids, because everybody here wants to make money. There’s this electric optimism in the business community. And it’s because people are just so dirt poor, even 15 years ago. Everybody here knows somebody who 15 years ago was working on a pig farm, or picking rice, who made it big, who are now driving a Mercedes or a BMW and has multiple villas. So, it’s created this community and this real can-do attitude throughout the entire country, and everyone’s just rushing to try to make money. The problem with that is there’s some downsides. I think culturally, there’s too much of a focus on money right now, and there are a lot of entrepreneurs who might be willing to cut corners in pursuit of the dollar, and that’s why you see problems in the food supply—you know, the food supply system here is a mess, and I actually have a whole chapter on some of the dangers on that in my book—and that’s causing problems internally, but also globally, because so much of the food supply chain in the world originates or has a part of it in mainland China, and that’s why Americans should be concerned about QC in food here.
JASON HARTMAN: Chapter one in your book says there are more Chinese billionaires than American billionaires. And what I have read is that wealthy Chinese are looking to move their assets out of China, at least to some extent; I doubt there’s a hard number on this, because it’s probably pretty hard to quantify. But, a lot of them are of course coming to the US, and buying real estate, buying businesses, opening bank account here and so forth. Do you see that there’s a flight of capital from China, at least on maybe a personal level, if not a corporate level?
SHAUN REIN: I don’t actually see a flight of capital, Jason. This is another myth that’s been taking place, and sort of seized the western media in the last year. It is true that many mainland Chinese on the wealthier side are trying to immigrate to the United States, Canada, and Australia, and picking up foreign passports. But we actually interviewed three dozen uber-wealthy Chinese with investible assets of more than $10 million USD, and the majority of them said that they did want to look abroad, and secure a foreign passport. But the reasons are a little different than what you see in the Wall Street Journal, or by Gordon Chang, the coming collapse of China thing. What we find is the first two main reasons why they want to get a foreign passport is, they want to secure better access to education and healthcare for their children. The second thing that’s important or key, is that while many people are getting, say, Canadian or American passports, they’re actually keeping their businesses in China. They’re still trying to make a lot of money here. But the third most final reason why they really want to get a foreign passport, is just convenience! A mainland Chinese passport really is inconvenient. It’s very difficult to travel around the world, to go to the United States, you have to wait months to get a visa. Well, if you have, say, an American passport, you can go anywhere in the world, and you can still open and do business in China. So, it’s more a matter of flexibility, and at the end of the day, just sort of an insurance policy. People are confident here, but if something goes wrong, it’s always better to get out. Because if something goes wrong politically, generally communist countries don’t have easy transitions.
JASON HARTMAN: Speaking of things going wrong, talk to us, if you would a little bit, about the civil unrest. I mean, you don’t hear a lot about it, but then sort of on the sly you hear about riots, and things like that. I guess they’re quashed pretty quickly there. It’s not like Occupy Wall Street where they sit around for months. What’s going on with that?
SHAUN REIN: You know, I actually have a chapter on this too. And basically, I think there may be 200,000 cases of civil unrest in China every year. Those numbers actually are not really increasing. And I think, you know, many of these cases are very similar to just an everyday protest in Wisconsin. These are not protests where people are trying to destabilize the entire government system. They tend to be targeted at one local corrupt official, or it’s there was of expressing dissatisfaction with something in their lives. So, it’s more isolated. Much more like a protest that I used to engage in when I was in high school in the United States. It’s not really, we’re trying to overthrow the entire system. China’s actually fairly stable. I totally disagree with John McCain who thinks that China’s prime for an Arab-style spring. A couple issues on that is that if you look at the political system here, there’s a lot more diffusion of power than a lot of Americans think. There’s mandatory retirement ages. You don’t have one single family that are controlling the whole system. So, even if people were mad, it’s not like you have the Gaddafi’s in Libya or the Mubarak’s in Egypt that you could really target or really try to overthrow. There’s a lot of people involved. And the second thing, there’s over 60 million party members in China, which means, everybody here has a friend or a relative in the party system. So, I think there’s a lot more stability than people think. You know, obviously we need to improve the quality of life for everyday Chinese and cut down on corruption here, because those are serious, serious issues. But I don’t see it causing an Arab Spring systemic threat.
JASON HARTMAN: It’s sort of surprising, really, Shaun, that corruption is such a problem there. I mean, the government there is so swift and harsh in dealing with corruption! I remember—what was it, the guy that was overseeing the—what was it, the melamine in the pet food or something—didn’t they shoot that guy? I mean, I kind of loved that in a way—
SHAUN REIN: Yeah, he was killed.
JASON HARTMAN: I gotta say, in some ways, I think the US could learn a few things, frankly. As long as they’re sure they’ve got the right guy, that’s my only caveat. But, it’s pretty risky to be corrupt there, isn’t it?
SHAUN REIN: It is risky. I mean, if they catch you, they do—the punishments are much more serious here than in the United States. You’re often put to death, or put in jail forever, for what would be considered relatively minor white collar crimes in the US. I think the issue is, the corruption is so systemic, it’s at every level, that a lot of people feel they can get away with it. And I think there is some truth to some critics, that maybe you don’t get caught unless you fall on the wrong side of the political struggle.
JASON HARTMAN: Yeah, interesting point. Modern Chinese women—they’re different, aren’t they? And—well, first, maybe before we go into that subject, is there a shortage of Chinese women?
SHAUN REIN: Well, I think this is another one of the great myths about Chinese society, which I try to cut down in the book. I have a chapter on them, and basically, my image before coming to China was that Chinese women were served like concubines, treated like cattle, and that they had a horrible life, and these were sort of the images that were shaped to me by The Last Emperor, you know, Bertolucci’s movie. But actually, Chinese women are moving up extremely fast, both in terms of power in the household and society. In the 1950s they only accounted for about 20% of household income. That went up to 35% in the 1990s, and now women account for about 50% of overall household income, and that’s actually going to continue to grow. There are more women getting university degrees than men right now!
And one of the keys is that as China shifts away from being manufacturing oriented to service and consumption, women are the big winners. They’re actually getting better jobs than men. So, I actually track in the book a lot of couples. Say, migrant workers who come to a city like Shanghai. The man can get a job making $120, $150 USD a month in construction, but women are able to get jobs making 3, 4, $500 USD a month as a maid, or working in legitimate massage parlors, or doing assembly of higher-end goods. And what we find is that men are making less than women in many migrant households. And so, you’re changing family dynamics, because woman are the major breadwinners. And so, there are issues though, about a gender imbalance. And I think that’s a serious problem in some rural areas. But it’s actually getting better, because now women, like I said, are making more money than men, and so, the demand for strong hands to work the fields is not as big as it used to be 20 or 30 years ago.
JASON HARTMAN: So, they’re more modern, but there’s not a shortage?
SHAUN REIN: There really isn’t a shortage. I mean, you see, in the urban areas, and I think in some rural areas, there are. And that’s actually why some local government officials turn a blind eye to the prostitution that’s taking place, because they want the men to be able to have an outlet.
JASON HARTMAN: [LAUGHTER]. No comment on that, but that’s interesting. So, one of the chapter titles that I find to be really amusing in your book here, is, why Chinese consider Kentucky Fried Chicken healthful. Is that because of the problems in the supply chain and the safe food issue?
SHAUN REIN: Well, let me ask you a question. Are you scared in the Made in China label?
JASON HARTMAN: No.
SHAUN REIN: I mean, you should be.
JASON HARTMAN: Well, I’m not looking at it as far as food. But certainly, most of the other products in my house are made in China.
SHAUN REIN: Well, this is how I do it. I love China. I’ve been here 12 of the last 14 years. But I’m scared of the food supply here. And actually, my firm, which is a market research firm, we interviewed 5,000 consumers in 15 cities last year, and their biggest concern in life, ahead of being able to pay for medical care costs for their families, or education for the kids, was food and product safety. People here are really, really scared about eating something and dying. So, actually, when we interview consumers, because I actually work with KFC as one of our clients—when I go out and we find, why do you go KFC? You know, one of the major reasons to go is that they view it as healthy. Now, I think Chinese know that KFC is not healthy. That if you’re going to eat cooking oil it’s going to hurt your heart in the long term. But they’re worried about—they trust that KFC is going to use good quality cooking oil and ingredients, and it’s not going to be toxic. Because people are petrified about eating food on the streets, where a lot of the restaurant owners use cooking swill oil, or they inject formaldehyde or other dyes, to make things appear healthier and taste better. So, yeah. There is a real concern about food supply here. And I think Americans should be concerned about products that are made in China for food. It’s definitely getting better. We’re light years ahead now than we were 10 years ago. But it’s still a serious problem.
JASON HARTMAN: But when you say product safety, you’re really talking mostly about food safety, right?
SHAUN REIN: Food, and I mean, I think even if there’s always been concerns about lead, in some of the coating of toys. Those are problems from 5, 10 years ago. But frankly, those problems are being reduced. Chinese consumers are demanding better quality products, and now they have the money for it, so what’s happening is, factories are really getting better. And then the poor quality ones are just shutting, or they’re moving to Vietnam. So, the stuff that’s being produced in China, in hardcore physical products that are being exported to the United States, actually is much better now than it was 5 years ago. Food still remains a serious issue. I mean, you saw the Chinese government even shut down 50% of the nation’s dairies in 2011, because there was too much poor quality milk, and people adding additives like melamine to the system.
JASON HARTMAN: Yeah, boy, that is scary. So I guess what we’d say is, KFC isn’t healthy, it’s safe. Right? That would be the distinction?
SHAUN REIN: It’s safe and hygienic.
JASON HARTMAN: Yeah, right. Okay, good point. Well, what about real estate? I mean, people are always talking about real estate in China, and the first thing I’ve heard that I’d like to ask you about, besides the more mainstream real estate topics, are, that I’ve heard there are just really giant cities that are basically vacant? Is that true?
SHAUN REIN: Yeah, there are ghost towns here. But the issue is—the reason why I’m not concerned about them is that they’re not being held by the developer. Not for sale. These empty buildings basically have sold out to end consumers who put down 50, 70% to buy the homes. They’re not highly leverages in the United States. So, even though they’re empty, it’s not causing a problem, because there’s no debt in the market place, and so there won’t be panic selling. Basically, wealthy consumers here don’t know where to put their money. You don’t have the same financial instruments for investing like you have in the US. Many people here don’t trust the equity markets because of rampant fraud. So, they basically put their money into housing, and they’re willing to hold it for 10, 15, 20 years. So, the real estate sector in these ghost town might indicate economic inefficiency, but they don’t really cause concern for me about a systemic threat.
JASON HARTMAN: Well, I think it’s really interesting. And actually, very positive, that Chinese favor tangible assets like real estate, something that they can see and touch, versus paper assets that are rife with fraud, like the stock exchanges and the equity markets. Yeah.
SHAUN REIN: Exactly. And they’re willing to hold on to these assets for 10, 20 years. You know, one of the differences between Chinese real estate and American, is that most homes in America come furnished. Or finished. And so when you buy it, you have to spend a lot of money in regular ongoing maintenance, and you have to pay annual taxes. In China, there are no annual taxes on most homes. And most homes are sold as an empty concrete hull. A shell. Basically, when you’re a homebuyer, you actually have to put in the pipes yourself, put in the tiles. So it’s really quite cheap for somebody just to buy a home and hold it for 10, 20 years.
JASON HARTMAN: Yeah, that’s interesting. It’s almost like buying a piece of vacant land. And you didn’t mean furnished—you meant finished.
SHAUN REIN: Finished, yeah.
JASON HARTMAN: So in other words, in these Chinese homes that investors are buying for these long term holds, there are no cabinets, air conditioners, pipes. There’s nothing to really steal or vandalize. So, it’s simpler that way too, right?
SHAUN REIN: Yeah. There’s nothing. It’s literally just an empty concrete hull. It’s like a subway, a New York subway, that type of concrete. And so what happens is, nobody, even if they’ve paid for the home, nobody wants to be the first person to move in. Because if, say there’s 300 units in a building. If you move in, you then have to deal with 299 other people renovating. You’ve got the workers who are doing the renovation living there. And so the concern is, will people ever end up moving into these ghost towns, or are they always going to remain empty? They might remain empty for 10 or 20 years, but my bet is that some developer will come in, buy the units, knock down the buildings, and put up even nicer ones.
JASON HARTMAN: And finish them all at once, and have people move in, the way they do in the States, right? That’s really interesting. Let me take a brief pause; we’ll be back in just a minute.
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JASON HARTMAN: Well, so, what is going on with prices and—I’m not talking about vacant cities, I’m just talking about normal markets where you have occupancy and so forth. What’s happening in Chinese real estate?
SHAUN REIN: Well, the real estate market is not collapsing. It is softening, and I think we’re getting to a far healthier range. Because before, everybody was just betting that real estate would always go up, and so, they were grabbing money and putting in. But what you’ve seen is no panic settling. So, even though prices have softened, those prices are more from the real estate developer selling to the consumer. But the second hand market, consumers selling their own homes to other consumers—those prices have remained very steady. Because again, you don’t see underwater mortgages. So we’re in a much healthier state in real estate than we were a year or two ago. So I certainly see a soft landing in that sector. Again, the key is not how much average income is in the country, or how high prices are. It’s really the people who are buying the homes—can they afford them, which they can, and are they overleveraged, which they’re not. You also don’t see hedge funds in China buying up tons of units and then splitting up the mortgages into CDOs and selling it out to other hedge funds who are borrowing $30 for every dollar in hand like you had in the United States, which caused the financial crisis there. Here, it’s still banks, pretty much, are holding the mortgages. It’s the financial system here is really very plain vanilla, and very outdated, but that’s actually helped the country from being able to avert a financial crisis.
JASON HARTMAN: Well, yeah, I don’t know if that’s a bad thing, Shaun. I mean, I love how these pundits in America call all the stuff Wall Street has done as “financial innovation.” I think it’s really just ridiculous, some of these products they’ve invented, and these “innovations,” I mean, those things are the problem. They cause all sorts of malinvestment, and bad behavior, and everybody now focuses on ways to game the system rather than to actually create legitimate value in our economy. So when you say, an outdated of system of banks that actually have to hold loans, and probably underwrite loans on more legitimate bases the way it used to be in old fashioned America—is that all bad? I’m not sure.
SHAUN REIN: I totally agree with you. I mean, it’s sometimes frustrating here. Actually as a consumer, you can only take out about $7000 USD in cash without applying in advance and getting permission. So, sometimes it can get annoying to try to get financial transactions done. But because it is outdated like that, it’s beneficial, because you don’t have runs on banks, and it’s a lot more stable. The whole system is set up to be simple.
JASON HARTMAN: It slows it down, but that really makes you understand why wealthier Chinese want to expatriate their money—because they want control of it. That’s way too controlling. I wouldn’t like it if my bank said I could only get $7000 out at a time. That would really bug the heck out of me. Well, let’s talk about China for a moment on the international stage. And not in terms of superpower stuff—I’d like to get into that next, maybe. But in terms of its business dealings around the world, with Africa, and you have a chapter talking about the end of American hegemony. Tell us about how China acts there. We hear the American spin on it over here, but it’s always been interesting to me when I travel—and I’ve done a lot of travel, I’ve been to 64 countries—when I read newspapers from different parts of the world, how different the angle is, and maybe it’s a lot more accurate, reading it outside of the corporatized American media. But, what’s going on?
SHAUN REIN: Chinese investment abroad is a double edged sword. So, I do talk with people from Africa, and Canada, and Australia, and Pakistan, about Chinese investment. And many people do welcome it. I was talking with some people in the mining industry from Perth, in Australia, and they love the Chinese investment, because they’re making tons of money. But for the people in Perth who are not involved in mining, they’re getting killed! Housing prices and food prices are going up so high that they’re really just not able to live well. And so that’s causing backlash. You know, I think many politicians are saying, do we want this Chinese money? Or if we want it, how do we handle it? How do we ensure that people who are say in retail, or healthcare, and have nothing to do with mining, are going to be okay? So I think China generally has to do a much better job at how it focuses on soft power, and how it relates to people from other nations, because they can’t—they’re too big now. They can’t just invest in other countries and say that we’re going below the radar. Because in many of these nations, they are seriously impacting prices. And so, China in general just needs to get a more well thought out, well planned foreign policy, and help some of their companies figure out—maybe you can open up charities. Maybe you can do stuff for local people, rather than just focusing purely on making money.
JASON HARTMAN: Well, that would require sort of an altruistic view of it. Or are you saying that’s just good business sense, good long term business sense?
SHAUN REIN: It’s business sense, frankly.
JASON HARTMAN: Yeah, right. Okay. Well, that’s legitimate. I agree with you. So, what’s going on with China in Africa?
SHAUN REIN: This is why I’m very bullish overall on the commodities sector. Is, China’s just investing billions of dollars. It’s doing over $100 billion US a year in trade with African nations. They’re going there to countries like Angola to buy up copper and oil and other minerals that are needed to sustain China’s growth. I think at the end of the day, the government here knows that the major threat to China’s continuing growth is access to natural resources. So they’re going to be continuing to expand out there, so investors should be really looking at getting exposure to the commodities sector.
JASON HARTMAN: Yeah, well, I agree with you there. Resources are key, and that’s what’s the fundamental underpinning of human life, is resources. So no question about that, commodities, very good. Talk to us a little bit about whether people should consider China to be a threat. And not from the angle of cheap China. Maybe we’ll close with that in just a moment. But militarily speaking—I mean, I see stories from time to time about China building aircraft carriers, and I don’t know really what’s going on with this. But military stuff—do people in the States have to be concerned about war with China, or any sort of violence? Or, maybe this conflict with Iran and Israel, and nuclear war in North Korea, or the proxy issues there—
SHAUN REIN: I worry about America creating a threat were there really isn’t one. And creating, you know, when you start to fear monger, many of your prophecies sort of become self fulfilling. I think right now it’s very clear that China is not a threat. The Chinese government spends more money on internal public security spending than on the military. A lot of their military spending is more just going for upgrading, for a lot of the housing for soldiers, and I think, on the one hand, China—the US wants China to take greater responsibility in global affairs, but on the other hand, it’s scared about China spending money on aircraft carriers so that they can pay for better security in shipping lanes.
So, I don’t think that China’s a threat now, by any means. You know, the official [unintelligible] looking more internally, and I think the officials are trying to make money for themselves and their families, and they don’t really want to go into war. But I do worry that there could be more increased tension, if the United States continues to scapegoat China for all of America’s economic ills. And I do think that threats could emerge if you continue to attack China politically. But I don’t think that there’s any concern for Americans as in looming Chinese military threat. I think at the end of the day, most Chinese actually like the United States, and that’s true of the political system, [unintelligible] President of China, Xi Jinping, his daughter is a student at my Alma mater, Harvard! And many of China’s politicals have sent their kids and grandkids to Harvard and Duke and Yale over the years. So, I hope that you’re gonna see more rational minds on both sides of the Pacific sort of prevail. My concern though, Jason, is that you’re seeing too much scapegoating, especially in a political election year in the United States, of China.
And I worry that that’s gonna provoke trade wars, or even war, if mainland Chinese military people say you know what, we need to shed the United States’ role as the world’s policeman and as a hegemonic power, so we need to stand up to them. But I think the odds of that happening are really more around 1%. I mean, for the United States, I’m far more concerned about Iran as a threat than China. China’s sort of a benevolent rising power, but could emerge as something else.
JASON HARTMAN: You mentioned about people going to all those American universities. Does China—is China coming up in the part of—I never hear about Chinese universities. I just never hear about—and maybe I’m just totally ignorant of it. I never hear about Chinese higher education. I always hear about people coming to the US for higher education! Is China really—I mean, they’re working so hard, and doing such a good job in so many areas of developing this country in terms of infrastructure, manufacturing, of course. What about education, higher education specifically?
SHAUN REIN: In general, I’m fairly supportive of the Chinese government, but there’s two areas that I’m scathingly critical. One is healthcare, and second, most important, is the education system. It’s a total, complete mess. I actually have a whole chapter on that, because it’s so bad that it could prevent China’s rise into true, sustainable economic and political superpower status. The education system here is terrible. I mean, you read in the New York Times how a lot of Shanghai students are outperforming the Americans on test scores. Who cares? There’s a big difference between being able to take tests and to be able to innovate and create and think analytically, which is why the best Chinese are now all going to the United States to study. You have over about a million Chinese have gone abroad to study in recent years.
You know, my boarding school, there were only two Chinese, I believe it was, who applied three years ago. This year there are over 200. When I was at Harvard in graduate school, there were more people from mainland China than from any other nation except for America. And the reason is that the higher education system in China is simply horrible. You have thousand person class sizes, people aren’t being taught to think critically, and that’s why what you see, Jason, is this big problem in the workforce. When my firm interviewed Fortune 500 firms here, they say that their biggest problem is being able to recruit and retain talent. They’re constantly trying to hire, and that’s their biggest problem and obstacle for growth in the next three years in China. But at the same time, 15% of university graduates here were unable to find a job three months after graduation. So there’s a disconnect. The market is looking to hire more people, but the universities are graduating people who are under-qualified. And so, you need a major overhaul of the education system here, and it’s not something that the government can wait; it’s gotta go now. I mean, every nation, historically, that’s a superpower, has the best, finest institutions of learning, and attracts people from around the world. The United Kingdom has Oxford and Cambridge, the United States has Harvard and Princeton. But China—it has nothing.
JASON HARTMAN: Well—yeah, and just distinguish that, if you would. Maybe segregate it between grade school and higher education university system, though. How bout on grade school?
SHAUN REIN: I think the grade schools are pretty bad too, because they’re still all so focused on just test taking. And they’re not training the whole person. You know, and I interview in the book many families who benefitted from economic booms here. They were the sons and daughters of the lead Chinese communist officials, and I even interviewed one family that’s a billionaire. And what they say is, we need to send our kids to the United States, because we want to train the whole person. In China, it’s all about test scores. We want them to learn about art and drama; we want them to learn about morality, and sports, and that’s something that really isn’t taught in grade school and high school in China, and it’s something that forms the bedrock of the education system in the United States. And while obviously America needs to improve, it’s still far better than anything else in the rest of the world.
JASON HARTMAN: That’s really interesting, because I look so down on the American education system. That’s interesting, that more liberal arts perspective, really, that you mentioned. Guess we sort of just take that creativity for granted here. It’s just sort of part of the culture. It’s kind of like the air—hopefully you never notice it, because it’s clean enough that you don’t notice it. Lastly, and just wrap up with this, if you would—your final chapter is basically the book title, the end of cheap China, and what it means to the rest of the world.
SHAUN REIN: I talk about in the final chapter, what is China’s new role gonna be? Is it gonna be a savior for businesses? In many ways, China has become the largest, or second largest market for many of the world’s companies, like Apple, Intel, Starbucks, or is it gonna be a major threat? And so I just sort of go through those issues, and come up—if you’re going to really capitalize on China’s growth, what are you going to do? Because if you don’t, China’s rise will ultimately be a threat to your corporate wellbeing.
JASON HARTMAN: Very good points. Well, Shaun, thank you so much for joining us today. Give out your website, if you would. And of course the book will be available on Amazon.com. When is it actually going to be released?
SHAUN REIN: The book, hard copy, comes out March 27th, but you can actually download the Kindle version now. I have a kind of surprising publisher, doesn’t control when Amazon releases the e-version. So, downloads of the e-version are taking place and selling like crazy. But the hard copy comes out March 27th.
JASON HARTMAN: Fantastic. And you can pre-order that. But if you don’t have one, get a Kindle. I love my Kindle. That’s great. And what is your website, Shaun?
SHAUN REIN: My firm’s website is www.cmrconsulting.com.cm.
JASON HARTMAN: Shaun Rein, thank you so much for joining us today! Appreciate it.
SHAUN REIN: Thank you very much for having me.
JASON HARTMAN: Well, I hope you enjoyed that interview today. And a few articles and comments I have for you on things. I know we’re turning this around backwards, and I’m coming on after our guest for most of the talk today, which is unusual. But we thought we’d just do something a little different. Maybe it’s in honor of Easter. So, happy Easter to you. That’s why we’re doing it. How’s that sound? Turning things upside down. So, there’s an interesting article in NuWire Investor. You’re seeing more and more of this nowadays. And I don’t really give a lot of credence to this being any big fundamental super exciting shift, what I’m about to talk about here. I actually have two articles I want to talk to you about that address this issue. I’ll say two and a half, actually, because one sort of does.
But, I tell you frequently that all real estate is local. You hear me say that constantly; all real estate is local, and it’s certainly true. But I would love to see more statistics, and more of these forecasts, and more of these reports, where we look at pricing data, and depreciation, and appreciation data, and just the general health of markets overall across the country. But, not only in a geographical form, but in a price segment form. Because if you think about it, all real estate is local, but all real estate also is relative based on its price segment. For example, as you know, I’ve lived in the greater Phoenix area now, for about 8 months, having moved from the Socialist Republic of California, and happily so. Happily having left California. And in this market, like any market, you’ve got a broad range of housing. But it’s almost more extreme here, because there is so much middle class housing that is reasonably nice that you can buy, that our investors buy all the time, for $90-130,000, say. But then you can go into areas of Paradise Valley in North Scottsdale, and other areas, and you can spend millions and millions of dollars on a property.
So, when someone talks about the Phoenix market, what the heck are they talking about? It’s like talking about the national real estate market, when all real estate is local, right? All real estate is local, but all real estate is also price segmented. Most certainly. Okay? So, in relation to that, I find these articles interesting, and I am seeing so many articles like this. Which does connote some degree of a change in the marketplace, for sure. And it’s worth noting. But it’s probably not worth getting like incredibly excited about. It’s worth getting a little excited about. And here it is. Housing market bottom found, says Bank of America. I guess that’s why B of A is so willing to do short sales nowadays. Because they want to get these properties back. So, maybe that’s part of the reason. Or maybe that’s part of the reason they’ve finally cleared out their foreclosure machine, and they’re making that process happen a lot more quickly.
So, just a little bit from this. It says, Bank of America, BOA, Merrill Lynch analyst, and Bank of America purchased Merrill Lynch, a couple years ago, as you know. B of A and Merrill Lynch analyst have announced the bottom of the US real estate market, and that bottom has been found. And that gains should be expected as soon as 2014. This is a revision from a previous forecast that saw price falls continuing into 2013, but a larger than anticipated decline in the inventory of distressed properties is prompting experts to move the market. BOA bulls—the bulls, bullish economists, right—also count new regulatory schemes and recent mortgage fraud settlement as feathers in the economy’s cap, although they are quick to point out a quicker bottom does not equal a faster recovery.
So, you know, what they’re saying there is that the market has bottomed. We’ve found the bottom. Now of course, I completely disagree with that. In expensive price segments, and expensive land value areas like California, northeastern states, Chicagoland, some areas of Florida, of course, and expensive segments anywhere they are found—I think those prices are still declining. I don’t think that’s a bottom at all. And as an opposite to that, what I talked about a couple shows ago, in our segment, the segment in which we’re dealing, where our investors are buying—I mean, prices are going up! They have been for a while now, no question about it. So, you gotta take all of this stuff with a total grain of salt, okay? The article goes on to say just one more thing. Housing prices are bottoming now, but the recovery will not begin in earnest until 2014, according to Bank of America/Merrill Lynch report released Thursday.
So, that’s kind of interesting, and I’ll have a little more on that in just a moment. Remember the call in line? You can call me for later broadcast on one of our shows, with your questions, your concerns, your thoughts on the market, on what you should do with your IRA, how you should invest, just like a radio call in show. The number for the call in line, again, where we will record the call, play it back on a later show: 949-200-8009. Again that’s 949-200-8009. And so, take advantage of that, just like would call any radio talk show.
You know, I’ve talked to you before about self-management, and how I am a total believer in self-management. I have not have one thing bad happen to me in my self-management experience over the last several years that would discourage me from self-management. So, anytime I find a property manager in my portfolio across the country that I don’t like, they do something wrong, whatever—I just get rid of them one way or another, and I self manage the property. If I like my property manager, if they’re good, if they’re doing a good job—heck, I keep them! Because I think a good manager is a huge asset, and a bad manager is not good at all, of course.
But, on the self-management note, it’s interesting. One of my properties that I have never seen, that has a tenant I have never met—the tenant emailed me the other day. And this property is in Texas. And I won’t tell you exactly where, and I won’t read the complete details of the email; I’ll just kind of paraphrase. But, he sent me a note saying that the air conditioner wasn’t working that well. It was cooling, but it wasn’t cooling enough. So, it probably needed a Freon boost, or something like that. Anyway, so I got a referral from my former property manager, actually, of all things. I said, who’s a good air conditioning person? So she sends me a referral. And he checks back with me—hi Jason, just wanted to check back to see where you were, if there were any updates on the AC unit. The repair man didn’t say much when he left yesterday, and I haven’t heard anything from him since. Let me know if I can help with anything, thanks.
And you know, this little—this salvo that I’m gonna talk to you about in the emails, it really goes to show you that all of these horror stories you hear about tenant problems and so forth—in my opinion, they are totally overrated. Look. I have been a landlord since I was 20 years old, okay? Well, really a little earlier, if you count a dealing with my mom’s properties. But, I’ve been a landlord totally 100% on my own since age 20, and that was years ago. And I’ll tell you something. I hardly ever have a bad tenant. I hardly ever have a problem tenant. And most people, and most tenants, are just good people that just want a fair deal and they take good care of your property! It’s just not that big a deal, these sort of horror you hear about tenants, okay? But like anything in life, negative stuff sells. And if it bleeds, it leads, just like the old newspaper saying. And you know, they say if you have an unhappy client, they’re gonna tell 12 people on average. If you have a happy one, you’ll be lucky if they tell one person, right? That’s just the way the world works. And so, that’s why those negative stories with tenants—I think it totally blown out of proportion. On the whole, tenants—good people. Just want a fair shake. They want to be taken care of with reasonable expectation.
I write him back and I say, I need to get two more quotes. The guy that came out emailed me a totally informal quote with no detail, and then he went out of town. Since you know your schedule, and I don’t, do you want to just Google two AC repair people, have them come out at your convenience, and email me the quotes? As soon as I have that, I can authorize and pay for the work. Sorry this isn’t working as well as it should. Jason. And he emails back and says, sure Jason, that’s not a problem. I’ll get a few guys out, and email you the quotes. I mean, don’t you love this? The best person to watch my property, most of the time, is actually my tenant. So, going on here—I’ll just read up the string in the emails here. I write back, thanks much, let’s get this fixed for you ASAP. Then he writes back, hey Jason, I’m getting the same from everyone around here—about $60 to $65 to come out and give a quote on the repairs. I found a few companies that come out and give a free bid, with another company’s written estimate. I tried to schedule an appointment with, and then the company name, for a free quote, because this is one of the companies he’s saying that gives free quotes, for tomorrow morning, but the homeowner must make the appointment. And you know, that’s true sometimes. I find that, that you have to actually call and say hey, yeah, it’s okay to come out and see my tenant. Can you call them, set up the appointment for tomorrow morning, I can get a free estimate from them in the morning, and get some more quotes from other companies in the afternoon? Once the appointment is set, I can be the contact for it, and I can send you all of the info, and the company policy to deal with the homeowner directly for the appointment. Sorry for the inconvenience. He has the name and the phone number of the air conditioning company.
I write back. I say, thanks. You can just tell them you’re the owner. Obviously I’m cutting corners a little bit, I’ll be the first to admit, if you’d like, so you can get the quote. Or just three way call me at, and then my phone number, and I’ll tell them that it’s okay. So, I mean, folks, look. The best person to watch your property most of the time is your tenant! And he writes back after that and says, okay! I’ll take care of it! So, that’s how easy this self management stuff is. It really is. And look. I’m not new at this. I’m doing it with several properties now, and I’ve been doing it for years. And think about how that changes the performance on one of your properties. If your management fees—and I think management fees, by the way, are quite reasonable with most managers. Most managers, like most tenants, are good people, and they do a good job. But again, when I don’t feel good about a manager, I just self manage the property, and use that as my way to decide. But if you can save 12 or $1500 a year on management fees, heck! That can increase your ROI pretty dramatically.
And people are all afraid of the old story of, oh gosh, I’m gonna get the call at midnight, with the garbage disposal is broken, or some silly thing like that. First of all, I’ve never had any calls like that. Most of the tenants, they just email you, and when they do, you know, you just email them back! I mean, how many of you are on your email all the time? You have it on your iPhone, you have it on your Droid phone, whatever, anywhere you are around the planet, you’re responding to emails constantly. So, it’s asynchronous, it’s not intrusive, and you can respond at your convenience. You do have to take care of business and be a responsible landlord. But heck, I’ll tell you something. Sometimes dealing with a tenant is easier than dealing with a manager! I think the self management thing is great. And by the way, I did a whole lesson on that. It’s about an hour long, and it’s in the members only section, if you are a member, at www.jasonhartman.com, and you can take advantage of it there.
Another article. This is from HW, HousingWire, and it says that buying is cheaper than renting in nearly 100 major US markets, according to the real estate website Trulia. And I would say, buying is cheaper, if you can buy. And this is what really makes it such an incredible opportunity for those of us who can, those of us landlords who can. The article here, it says, buying is more affordable than renting in 98 of the nation’s 100 largest metropolitan areas. Even in New York, Los Angeles, and Boston, according to real estate company Trulia’s rent versus buy index. The index is based on asking prices for rental units and homes for sale on the company’s website between December 1st and February 29th. As rents rise and prices stagnate, homeownership is becoming even more affordable. But rising rents create a dilemma for people who can’t afford to buy yet, says Jed Kolko, Trulia’s chief economist. “Rising rents make it harder for people to save for a down payment, which is the biggest barrier to buying a home that aspiring homeowners face. Homeowners are choosing, or being forced, to rent rather than buy, even though the latter is cheaper in markets Trulia reviewed. But as they turn to renting, the influx of demand squeezes the nation’s rental supply, pushing monthly rents higher.”
Folks, don’t you love being a real estate investor right now? Wow. I mean, everything has just coalesced to be—this is the proverbial perfect storm we are in. Low interest rates, the opportunity to get 30 year long fixed rate debt by below the cost of construction, a huge student loan debt bubble where Gen Y can’t afford to buy because they’re pressed by this huge student loan debt that is not dischargeable in bankruptcy, there’s no second chance with student loan debt, you gotta pay it—wow. What a time to be a real estate investor. What a time to serve these people who are faced with all of these challenges in today’s life. And it is just a phenomenal time. There is a huge generational shift in the making, in the housing market. And it is based on so many of the factors that we’ve talked about. Folks, this is an unbelievable time to be a real estate investor.
Well, rather than go too long with this, because I know we’ve already had our guest, I’m gonna save my now—oh, how big is it? I think I’ve got the stack of stuff I want to share with you down to one and three quarter inches now. And I’m going to save that for future shows. We’ve got a lot of great stuff coming up. I interviewed Harry Dent again today, I’m having him back on the show, and what he had to say was very interesting, in a quick 22 minute interview. We’ll have that up for you soon. And just have a lot of great stuff. Remember, we have a lot of unique financing as well. We have $5000 down opportunities in St. Louis. We have foreign national IRA financing, and financing for people with too many Fannie Mae or Freddie Mac loans, who can’t get that type of financing. So, if you are a foreign national, if you want to buy US real estate, if you want to invest with your IRA, or if you have too many loans, or if you only have $5000 down, we can help you. Contact our investment counselors through the www.jasonhartman.com website, and we have lots and lots of really innovative opportunities.
By the way, I did want to mention, and we don’t have this on the website yet. Well, we may by the time you actually hear this show. It should be up in the next day or two. But we are planning a tour. Actually, not a tour, but a Creating Wealth Boot Camp. That’s sort of our seminal event. We’ve had thousands of people come through that over the years that I’ve presented that to, and just with great reviews. We’re going to have that on Saturday. It’ll be a Saturday in mid-May. And then we will have a tour, a property tour, the following day on Sunday. And this will be in St. Louis, Missouri. So, that should be a great opportunity for those of you who are on the east coast, or the middle of the country ,that haven’t been able to make it out west for one of our events. We will bring the Creating Wealth Boot Camp there to St. Louis, and then have a tour the next day. And guess what? We even have another bonus, if you’re interested, and there’s no additional charge for this. It will be the following Monday, where you can also do a tour of that market I love so much, that below the radar market I’ve talked about so many times, and that is, of course, St. Robert, Missouri.
So, we will have a tour of St. Robert on Monday. Again, Saturday, St. Louis Creating Wealth Boot Camp. That’s a full day. And then Sunday, St. Louis tour, and then Monday, optional if you want to go, St. Robert tour. So, just a great way to see two markets that you might not normally visit. If you’re closer in that part of the country, it’s a great opportunity for you folks to come and see the Creating Wealth Boot Camp that you may not have yet experienced. More information on that on the www.jasonhartman.com website under events. Check that out, and we will look forward to talking with you on show #253, very shortly. Thanks for listening today.
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Transcribed by David
The Jason Hartman Team
Episode: CW 252: Rapidly Rising Costs of Business in China with Shaun Rein Author of "The End of Cheap China"
Guest: Shaun Rein
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