During the last two decades, people in the United States have all discovered the new inexpensive products that are made in China. You can walk into any supermarket like Wal-Mart, K-Mart to high-end stores like Macy’s or even Gucci stores, you will find them. From the smallest stuff like cell phone covers, bracelets, toys to big items like the biggest crane in the world at the Harbor of Oakland. The trade deficit between the US and China has grown to hundreds of billions of dollars. This deficit has become another major arguing point in the push for the Chinese currency to appreciate rapidly. Most of the Americans see Chinese products as both a valuable part of life but also a potential threat of their lifestyle. However, “Made in China” will not be always cheap. If we look at the cost structure of most of the manufacturing plants in China, we can discover some new trends.

In China, there is a custom to divide people by the decade they were born, as I was born in the 1970s, I am a “70er”. The workers and labors that provided the US with cheap products were mostly 60ers and 70ers. They left their land and home in the 1990s and 2000s to the cities and provided enough labor for the influx of manufacturing facilities on the west and south coast of China. This group of workers, mostly born out of poverty, was willing to work for low wages, harsh conditions, and strict regulations. I have seen monthly salaries at 500 RMB (roughly 60 USD at the time), warehouses in the 110F, and head-to-toe search by security guards. According to some of my Taiwanese friends who own many of manufacturing facilities in Suzhou, their cost structure was absurdly equipment and asset-centric. Labor cost accounted for only 5 to 8% of their total cost, while their profit margin was always more than 20%. By old Marxism terms, I call them “the extortionist capitalist”. They ripped huge profits between the cheap labor in China and the huge market in the US.

The time is changing. As we move into the 2010s, the 70ers generation are returning to their homes and retiring. Two new generations, the 80ers and the 90ers, are coming to take on the roles of their forefathers. In addition, as more and more manufacturing facilities are moving to China, more and more are hiring to fulfill their thirst for cheap labor and profit margin. BUT, the 80ers and 90ers are different in many aspects. According to a recent survey, when the 80ers and 90ers decide whether to choose a job or not, the determining factor is “respect”. The term “respect” is defined in many ways. Respect with proper pay; respect with humane working conditions; respect with personal management; respect with less strict regulations but more goal-oriented. They want more personal freedom and more flexibility, well, they have learned well from the US.

During this trip in China, I have visited many of the same Taiwanese friends as I did before. And they all agree that their plants are not running at full capacity, even though they have enough orders from the US and other countries. They simply cannot find enough workers willing to take the salary and the working conditions that they offer. Some of them decide to pay the workers more and offer better working and living conditions, with some success. Their profit margin, however, has gone below 10%. And they all believe that they will add the extra cost to the new orders to come. I estimate a 10% to 20% percent hike for products coming from China during 2011 plus the additional cost of depreciating USD.

As a general trend, most of the plant owners I have talked to in Zhejiang and Shanghai are worried. They all face the same problem, domestic, foreign or joint-venture. To make it even worse, the new profit-based education system which was put together in the last 15 years by the Chinese Ministry of Education have produced many “so-called” college graduates. Most of the readers will probably not understand why I used the term “so-called”. The Ministry of Education divided the college system into many levels, for example, “level 1” schools are the Qinghua University, Beijing University, i.e., the old good schools; “level 2” schools are the new good ones, i.e., Beijing Law and Politics University; “level 3” and below are the crappy ones, mostly formerly known as “career schools” providing career-specific training parallel to regular high-school. For “level 3” college graduates, because the only thing they have after graduation is the degree certificate issued by the Ministry of Education, and they have learned very little during college because it was too easy; it is very hard for them to find “college-level” jobs. Each time I talked to these graduates, I felt like seeing a perfect package with a defective product inside.

As a personal experience, I once needed to hire a regular entry-level C++ programmer. If I were in the US, I could easily hire someone after going through 10 resumes and 3-4 interviews. It was entirely different in China, after going through more than 100 resumes, and called in for 20 interviews and to my surprise, only 1 knew answers to some very basic questions in C++ structure programming, most of them told me flat out that they knew nothing about C++ programming even though their major were “Programming”. This has become another trend in China, where good skilled labors are hard to find and need to be treated well, while there are not enough high-paid jobs for non skilled workers who are not willing to take less.

So the shortage of labor at the plants and the shortage of high-paid jobs create an interesting phenomenon – shortage of labor and shortage of job co-exists! If this trend continues, the divide will widen over time and thus create more social problems for the Chinese government. Well, the Chinese government guys are not fools; they have created a systematic solution – the new social welfare and insurance program for the entire population. Yes, you got it, what Obama is trying to do in the US, it was already done in China through the announcement of a series new laws, mainly the new Labor Law of China. According to the new labor law, all employers must buy insurance for all their employees, full-time or temporary, and the cost of getting insurance is shared between the employer and the employee; there is no “opt-out” for anyone, you have to buy it or you are in violation and could be hit with a huge fine. The cost for employee, at least in our town, is 160 RMB per month at a minimum, and for the employer the cost is 420 per month at a minimum. The amount is rising at about 7-10% per year. If the employee gets a high salary, the insurance is calculated at 30%, no matter who actually pays, the government will collect by the end of year. In reality, all costs are “absorbed” by the employer, thus compared with 4 years ago, all employers must pay an extra 30% for insurance. Over time, more and more local governments are enforcing this new law and more and more plants are lowering their profit projections to accommodate the cost while trying to fulfill their existing contracts. This will not sustain over time. The plants will be forced to divert most of the cost to the wholesalers in the US, and thus to the end consumers.

Of course, with this new insurance system, more people are putting money in than taking money out, so there is always a surplus at every Chinese government level. This is always good news for them because they always need more money to build more lavish office mansions, buy new cars and hire more security guards. BTW, if you have seen some of the local government buildings, you will be surprised to find them more stylish and modern compared with the ones in the US. In the little town where I reside, the local government spent 12 billion RMB to build the “most luxury county government building” in China. It has new become a tourist attraction. If you haven’t heard of it, search for “Changxing government building” on Google.

Who said the Chinese government never does anything for the people? They do sometimes perform. With the insurance money people putting in, they have created a complete social welfare system including the following:
 Medical insurance for all who participate in the insurance program, plus medical assistance for all peasants who have to (all) participate in the new rural medical insurance program
 Child-birth insurance
 Workers compensation
 Disability insurance
At least in my little town, people are happy with the new system, except for the hospitals and doctors and nurses. People who live below the poverty line, there is a standard of 400RMB per month, will get a supplement from the government. And of course people who manage all the above systems and insurances will get paid as well.

In addition, the government also encourages employers and employees to contribute to a “housing fund” which is very much like our 401K system since it is deducted before tax. Employees can borrow from the fund and buy apartments, I say apartments, not houses, I will explain in a different article on housing in China. Any surplus of this fund, which is also managed by each local government, can be used by the local government the way they see fit. Last year, the local government used the surplus to buy some Audis and Toyota Crowns for the officials, and bought some food and clothing for the seniors before the Spring Festival. And in the end, the plants pay for everything.

If we consider all the above facts, we can see that cost of labor in China has risen sharply over the past 4 years; my estimate is between 20(inland)-50(coastal)%. And the cost will rise at about 5-15% annually. If the Chinese government continues to push for more economic incentive program like the high-speed rail system, the cost will rise even faster since the new programs will compete with the plants for labor. Some of the manufacturing companies have seen this and are moving their operation either back to the US or to other countries like Vietnam to control their costs. This trend will continue. “Made in China” will no longer be the synonym for inexpensive, and the US consumer will have to find other ways for cheap products.

To most Americans, owing a real estate property means paying the brokers to buy, dealing with the title companies, and paying the real estate taxes, what they don’t realize, is that all the above are activities that allows complete ownership of the property, which is protected by the Constitution. Owning a home has always been the American dream, immigrants like me, are fool-hardy proof of that.

Many of my American friends have asked me what it is like to own a real estate property in China, since I have bought and sold numerous ones there. My answer is always, do NOT buy a real estate property in China unless you know what you are getting into, and what everyone knows  – buy low and sell high.

Even though the Chinese government sped up their process of privatization over the past 10 years, the most valuable property – the land is owned by the government. They say it belongs to the people, but in reality, the people cannot determine what they can do with the land; the government does.

This creates in interesting question, if the land belongs to the government, how do you “own” a house in China? The answer is, you don’t. Let me explain through the entire process.

When you buy a house or a piece of real estate property in China, the first thing to do, is to check whether the seller or the developer has the proper government authorization. The authorization consists of 3 parts,
1. The government allows the developer to develop residential or commercial properties in a certain piece of land
2. The use of the land is limited to 70 (sometimes 30, 40, 50 depending on the case) years
3. Once the time is up, the government can take the land back
If the authorization is complete, you can then go ahead sign a pre-formatted contract and pay the seller or developer and start the transfer of ownership process. You can do this yourself or hire an agent. However, be warned, an agent in China is just an agent, you still take full responsibility of any error or problem the agent creates.

The money you have paid actually consists of 2 parts,
1. The money to buy the land which your property is built on, if it’s a multi-level building, you pay your share by size
2. The actual property itself
Why the distinction? Because once the transfer of ownership is complete, you will receive 3 certificates:
1. Certificate of land, which states that you are allowed to use which piece of land, and if it’s a multi-level building, shared by how many others
2. Certificate of building, which states that you own the property
3. Certificate of title, which basically combines the two above and says you are the owner of the property

Interesting, hah? You may ask, if you don’t own the land, what happens after the term ends? Well, at this time, nobody knows! BUT, the big but, is that the government has the right to take the land back without paying you a single dime once the term is up. And since your property is attached to the land, it then will belong to the government as well.

Then you may ask, why are people in China still buying? Are they stupid? The answer is no. As far as I can see, Chinese people always want to own their house rather than renting. This is probably in the blood. It’s also sort of the Chinese Dream, owing your own home. With the billions and billions of people in China, there are plenty have to buy. In addition, there are people like me, who see real estate properties as an investment vehicle since it’s probably the fastest way to grow net worth. Buy-to-rent is not a real option in China since rent is never enough to cover the expenses to buy a house. Like my properties, I bought them mainly for appreciation and plan to sell them at a certain point, and in the process renting them out just to make some small changes.

With the real estate price going up so rapidly in China in the past few years, more and more investors are finding themselves buying up properties. This has created a self-fulfilling prophecy and real estate price has been in an upward spin for years all around China. The price hike is a double-edged sword for the government. On one hand, the government can sell land at higher and higher prices to the developers and generate more income and spend more. On the other hand, the price has gone up so high that the majority of people cannot buy anymore. With the rapid growth of private business and government scandals, people have become more angry than ever. The government needs to control the real estate prices to calm the people down. Real Estate price control has been a major topic in the People’s Representative Conference which just finished two days ago. The government wants to control it at an affordable level while keeping the income level.

Again, the smart government officials and their scholars come up with another bright idea, let’s learn from the Americans and start collecting real estate taxes. And in a typical CCP style, it has already started in Shanghai and Chongqing as pilots, and eventually will start collecting the entire country in a few years. Shanghai and Chongqing have different rules and different financial targets for the new real estate tax.

In addition, the central government in Beijing also gave authorization to the local government to make up their own rules to restrict buying real estate properties. How? Each city is different. For example, in Shanghai, if your family is official Shanghainess then your family is allowed to buy two properties in total, once you finish your quota, you cannot buy anymore. If you are from a different part of China, your quota is only one. If you are a foreigner, you have to prove you need to live in Shanghai and have to buy a property before they allow you to buy. This is interesting, because I have friends who would go out and get fake divorce and thus create new opportunities to buy.

What happens next? Nobody knows! The biggest problem I see, is that the taxation of real estate property is against common law and common sense. Common sense tells us that any property tax should be charged to the owner of the property, not the renter. In addition, to investors like me, each year we pay taxes and put more money into the property, but when then term on the land expires, the value of the property goes to 0. So we are actually paying for the usage of the property for the term, be it 30, 40, 50 or 70 years. Isn’t that just renting? And the government is the biggest owner of all properties? Interesting, ha?

Today, when you look at the real estate prices in Shanghai, you would find the buyers are all too rich or crazy. For example, a good friend of mine bought an apartment in a high-rise building in Pudong district (the new district closest to the PVG airport), 90 square meters for 2.2 million RMB. 90 square meters is roughly 810 square feet and 2.2 million RMB is about 335K USD. This is slightly lower than the properties in California, but if you consider the fact that you can only use for 70 (or less) years and it’s an apartment, you would think he is crazy. How far and how long can this go? Again, nobody knows.

My goal is to sell all the investment properties this year while the market is still good. It feels like a relay race, whoever gets the next round will have to pay more, and the last person to the finishing point loses it all, and whoever get to the finishing point faster will be the biggest loser!