China Risks

Let me list the issues I think are facing China, and there are plenty:

1. Financial leverage (Individual)

• I find it amusing when I hear the argument that Chinese families in general take very little debt, so there is no problem of over leverage, and all real estate is paid off in cash. My observation is that every single new development since 2-4 years ago have been purchased largely with debt. The issue is worsened because on top of debt, the downpayment was paid by the purchasers' PARENTS and using THEIR pension money. 
• One should not underestimate the importance of family in China. Parents are willing to do anything within their ability to ensure their kids success and well being, even to the extent of suffering themselves. This concept is unknown in the West.
• Many of those born in the 80s/90s are far less hardworking then their elders. This is a big concern. They have grown up in the boom years, and have never experienced hardship. They feed off their parents. Its great when their parents are real estate moguls. But these guys and gals buy Mercedes and LVs when their paycheck is USD1000/mth. They are like tigers in zoos who have not seen a jungle.

1. Financial leverage (Banks)

• So the excessive leverage of homebuyers will impact the Banks. If ICBC or BOC is levered 40:1, then it takes just 2.5% of the banks' loans to go rotten to bring the entire bank down. Of course PBOC will come to the rescue, but good bye shareholders of these banking stocks....

1. Creativity

• Until today, there has been nothing worth mentioning in terms of new innovations and practical ones out of China. This should not be the case. Japan, in its same stage, would have already come up with the Walkman and Betamax, had JVC, Hitachi, Sony etc. The problem lies with copying western ideas (equivalent of facebook, google) and then selling locally while blocking external entrants. 
• So far, movies made in China may sell off as pirated only after a few weeks, compared to almost immediately for western movies. There is little if at all any value to create intellectual property, since it can be stolen and replicated so easily
• There are many intelligent graduates but it is a wonder why these graduates do not get employed in areas where they have studied in, and become salesmen, real estate agents or taxi drivers.

1. Aging population

• When everyone is starting only to have 1 kid, and that kid has to support 2 parents (4 including his wife's parents), and kids, then it is a big problem with an entire 3 generation family is standing on 1 or 2 legs and everyone is consuming a lot, but not earning enough. The problem is going to excerbate in the coming years as the parents grow old...in chinese custom, would you allow your parents to go to an old age home?

1. Rich Poor Gap

• The Rich mainly got rich through real estate. The poor didn't get rich because they didn't have an extra property. 
• The poor will be squeezed out.
• The culture of Chinese is also to be proud of wealth. It is actually something to be admired and to be proud of.

1. The West

• Even a bigger worry is the West, where population will only rise and will not experience aging. Can the aged East cope with the young West if it tries to pull away. The West is where the resources are.

1. Pollution

• This is probably the key issue that is plaguing the country, and will lead to disease and early deaths in the general population. The level of pollution is intolerable, other than brief periods such as the Shanghai Expo. 
• The level of hygiene is also very poor even at top 'world class' places, which hire rural workers and package them with a high-tech front.
• The quality of life and environment in China is light years behind Japan, conservatively 20 years, probably 30-40 years. Until a solution is found to reduce the population and coal consumption. The population will fall in 2050-2060.

1. City Governments in deficit

• So far, city governments are not collecting enough taxes and get by with selling land. That's fine when land is still appreciating, and the land further out is more expensive in 1 yr than the land in the business district. But when the bubble pops, there will be far less cash for many expenses, a poor tax collection system.

So in summary, the immediate problem is the BUBBLE and when it will BURST. When it does, I am sure it will have terrible repercussions.

The longer problems need to be tackled and thought about now.