For individuals and companies, there is a simple formula which has to be examined for the long term health and that is revenue is greater than expenses. This simple formula is the lifeblood of all organizations and anyone that wants to invests will ask the question are the revenues greater than expenses. If the answer is yes, then one can move on to how much and details of the where the revenues are coming from. If the answer is no, then the issue is when does it change? If you examine countries, the variable is taxes, but still revenues still must be compared to expenses.

In an article by Keith Bradsher of the New York Times News Service, for the past 40 years, China had a surplus now it is experiencing a downturn and the large credit rating services including Moody’s are issuing a negative outlook for the Chinese government’s financial health.

For the past 30 years, the Chinese economy has been based on a strong manufacturing base, the Chinese government’s infrastructure program and a very strong real estate market. These forces brought hundreds of thousands of people to move from the rural areas to jobs in the cities and a very healthy housing demand. The property market was up to 25% of China’s economy and it helped make China’s largest property companies some of the largest in the world.

Until recently, China has seemingly unlimited money to spend on the world’s largest bullet train network, a vast military buildup, subsidies to manufacturers and extensive overseas construction projects tied to the Silk Road and a build up in African countries.

The tide has changed and China has serious budget constraints, triggered by a steep slide in the real estate sector. The vast construction of apartments, factories, office towers was 25% of China’s economic output. Apartments are the primary investment for families accounting for 3/5s or more of their savings.

Technically the national government has borrowed less but local, state and and state owned enterprises have made up for the borrowing. In China, little of the borrowing is from non China borrowers. The national government sell bonds to the country’s state own banks. The country’s regional government and local governments and state owned enterprises sell the state owned banks.

The large real estate developers are becoming insolvent or unable to finish thousands of apartments and bills for the trade services are unpaid. One can image 25% of the economy has a large effect on small businesses, contractors and the service industry. In addition, part of state government’s revenues was the sale of land to developers who have stopped buying land which puts a hole in state governments budgets.

Moody’s believes the national government at some level with step in to ensure bills are paid.

China’s Ministry of Finance agreed that state’s revenues are down, but they are spending less on infrastructure than before.

Moody’s believes China as the 2nd largest economy in the world has the ability to absorb shocks in the system, but long-term positive fundamentals have not changed.

Linking to dividend paying stocks, one of the reasons investors tend to like these companies is they pay their debts. Whether the situation is for an individual or a company, debt can be a wonderful tool to use, but debts have to be paid. One expects in dividend companies have profits to pay debts and to distribute those profits to shareholders. Sometimes balance is the key to success.

There are more questions than answers, till the next time – to raising questions.