The Truth Behind China’s Low Product Prices and Rising Material Costs

Posted on July 27, 2005 10:28 PM | Permalink | Comments (0)

By Deliang

It is very important to know the truth of a situation. Many of us have had the experience of being cheated. This is because we did not know the truth; as a result, we paid prices that were too high. Not knowing the truth will cause us to erroneously evaluate the alternatives and make wrong decisions.

I recently went to dinner with students from the Taiwan Donghai University, and met a former student who is in the import-export business. He disclosed some facts to us that were quite shocking. He asked us if we knew why the material costs around the globe were rising, yet product prices are falling. It is because the supply is greater than the demand. Why is the supply greater than the demand? This is because many less expensive products sold all over the world are “Made in China.” We thought that China’s low labor costs were the reason. As a matter of fact, this is not the case.

Mr. Wang disclosed insider information he received from several high level Chinese Communist Party (CCP) officials. He said if a product cost 10 yuan, a normal sales price should be 12 yuan, or a minimum of 10 yuan. However, Chinese factories are selling it for only six yuan. They do have large volumes of foreign business, but isn’t this still a failing business?

The CCP officials told Mr. Wang that the key is Chinese factories require “no investment.” They do not need any capital, all the money comes from the state-owned banks. The factories will have income as long as they have contracts. Although the product only sells for six yuan, they only need one yuan to pay the labor expenses, one yuan to pay the bank interest, and the remaining four yuan is profit! This is their business strategy.

They divide the four yuan profit between themselves and travel overseas to buy real estate. They are not buying typical houses, but mansions, with cash. This is a very common phenomenon. Mr. Wang asked a CCP official, “What if these failing businesses go bankrupt?” He smiled; his wife and children would all immigrate overseas. He even touched his pocket, saying, “My airline ticket is right here; I can leave the country any time I want.”

This is the secret of how Chinese factories operate!

The U.S. and EU are applying severe pressure on China to raise value of their currency. If China does, it will negate their export advantage, since Southeast Asia and India also have low labor costs. When Chinese factories lose business, they will not have the cash reserves to pay the bank loans and wages, and will go bankrupt as a result.

As a matter of fact, the entrepreneurs and CCP officials who are shareholders of these businesses could all foresee this happening, which is why they have all purchased mansions overseas and have even purchased their airline tickets in advance. This way they can escape when the bankruptcy occurs.

Now I completely understand why China’s banks have bad debt ratios as high as 40 percent to 50 percent. This is the truth behind China’s 8 percent annual GDP growth. Now I understand why so many experts and scholars predict that China’s economy will soon collapse.

Source: The Epoch Times