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China Economy Booms as Farmers Get Access to Credit

Economics / China Economy Sep 13, 2010 - 03:08 AM GMT

By: Shae_Smith

Economics Best Financial Markets Analysis ArticleThe second stage to the booming Chinese economy is about to begin.

And many of the country's farmers, with little more than shacks and eight kids to feed are going to be the driving force behind it.


No longer will the Chinese economy be solely reliant on cheap manufacturing of DVD player's and mobile phones.

Now, these farmers will be able to step out of poverty and embrace the benefits of consumerism, like many of their city living countrymen.

'Chinese farmers are possibly about to be sucked into the greatest financial revolution since the invention of the credit card,' said one media commentator.

And it is, mostly for the Chinese government proving that they are part of the finance revolution.

See, private land ownership for farmers in China is strictly forbidden. Farmers have only been allowed to profit from products that arise from the use of the land, rather than the land values itself.

Compare that to their city dwelling citizens that were awarded property rights back in the 1990's from the government.

However, now, after a successful trial with some peasant farmers, they will now able to use their land as collateral to obtain finance. While it's only been kept to a small group, it's been suggested it could go ahead nationally by the end of this year.

The trial, which has been going for almost two years, has each year seen increasing amounts borrowed on the back of land values. In fact in June this year, outstanding loan values from the small trial provinces was 2.6 trillion Yuan (AUD$415 billion), up by 24% for 2010.

What has prompted this move to allow Chinese farmers to use the land in order to access a loan?

Is this a giant leap forward or just another way to enslave the nation - which is already under totalitarian control?

It seems to us that a controlling and dominate government has found yet another to ensure that their booming economy remains under their control.

Which is to give the poorest people in the country access to finance, secured against land which right now, no-one else is allowed to buy.

See right now, the Chinese market is saturated and consumers have only been able to purchase so much.

If China wants to even out their economy and move towards a consumer driven market - cause that's proved to work so well in the past! - then it must work out how to lift these farmers out of poverty and encourage them to spend.

Especially if consumers in the US and Europe aren't interested in buying Chinese goods.

And in order to getting them to spend up, they need to give them access to credit. See, farmers' incomes, which average around $600 a month, have only doubled over the past 15 years. Whereas the city residents, already earning twice the income of rural population back in 1995, have seen their incomes quadruple over the same period.

And it's been China's urbanisation that has been the driving economic force. If it wants to keep being seen as an economic force, it needs to work out a way to lift the farmers out of poverty.

Except, they're going the wrong way about it.

The Chinese government is simply trying to get poor farmers to buy stuff. In reality, what they should be doing is giving farmers - and everyone else - economic and personal freedom, and property rights.

That way there would be an incentive for the Chinese to increase their wealth. Especially if they knew they could keep the wealth once they've earned it.

Yet the Chinese have fallen into the same trap as Western society. Believing the best way to wealth is to encourage the population to go into debt.

Not only that, but this major economic reform comes at a questionable time. China's economy may be booming, but what about its major export markets?

The trial commenced at the start of the global financial crisis when the US and UK financially fell apart. And yet, it's been given the go ahead to go national, about the time the same countries are dealing with slowing economies.

And by slowing economies, I'm really referring to the lack of American and English consumers finding the incentive to buy cheaply made electronic goods.

However if the Chinese government get their way, and I'm sure like all good dictatorships they will, it will ultimately mean boosting consumer spending.

This means that the country will be able to maintain the high rate of economic growth - until they figure out there's no way the poor peasant farmers can repay the loans. Because despite the increased debt and the new material belongings, they will still be peasant farmers.

This move by the Chinese isn't about offering the same freedoms as the city people. And it's not about freeing an impoverished part of the country with access to cash.

It's all about ensuring that China can continue its path of economic dominance, by using debt to control its people, and at the same time creating the world's biggest consumer bubble since the last one!

Shae Smith
Assistant Editor
Money Morning

Shae Smith is the assistant editor of the free e-letter Money Morning Australia. Shae Smith started in the finance industry over 11 years ago. During that time she’s worked in many roles, the most recent was for a Melbourne stockbroking firm.

Copyright © 2010 The Daily Reckoning - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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