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China: It’s the Year of the Draggin’

5 reasons you should think twice about investing in Asia in 2012

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Western media, such as the NPR radio show highlighting “The Agony and The Ecstasy of Steve Jobs,” introduced Americans to the idea of teenagers working up to 16-hour shifts wiping screens or sleeping 15 people to a 12-foot-by-12-foot room.

Chinese media, since it is state-run, obviously has avoided such pieces.

But Foxconn is hardly alone in its efforts to lure cheap migrant laborers to its facilities as a way to keep wages low and margins very high. Workers at an LG Display (NYSE:LPL) factory making flat-screen displays in eastern China recently went on strike to protest similar conditions, halting some production.

In late 2011, Reuters posted a rather stark outlook on worker unrest in China. Here’s a line that sums it up best:

“At factory towns across China’s export powerhouse in the Pearl River Delta, a vicious cycle of slowing orders from the West and increasing wage pressures has led to a series of major strikes that could reverberate through the economy.”

In short, Foxconn’s troubles are representative of a general unrest in China’s manufacturing sector. The country has seen huge growth in the last several years, and many companies have seen huge profits as a result. Unfortunately, that growth frequently has come thanks to workers getting paid rock-bottom wages and working under harsh conditions.

That model is not sustainable. One way or another — either through higher production costs, strikes or shutdowns — Chinese manufacturing is going to have to address these concerns.

‘Shadow Banking’ Threat

According to a study issued by the People’s Bank of China in 2010, non-banking-sector lending expanded to anywhere between $1 trillion and $10 trillion — as much as 40% of the total lending activities of China’s economy. These loans come with exorbitant interest rates as high as 70%. They can come from individuals, akin to loan sharks, but they often come from legitimate businesses, too.

Now this isn’t high-interest lending Atlantic City-style, fueling degenerates who just like to gamble and do drugs. These are investments — loans to start-up businesses or folks looking to buy real estate. In a red-hot economy these arrangements seem like a win-win, with both the lender and the borrower alike coming out ahead.

But what happens when loans can’t be repaid? Unlike banks, which have a large portfolio of loans and assets to fall back on, individuals making these loans don’t have diversified portfolios to protect them. In fact, many lenders may be borrowers, too — creating the risk of a domino effect.

Back in late 2011, I wrote an in-depth analysis of China shadow banking. At the time, China had pledged more oversight of such unregulated transactions. But with growth dependent on easy money and growth harder to come by these days because of the issues previously discussed … well, I have my doubts.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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