A blog on Chinese economy & society

Posts Tagged ‘global balance

Andy Xie: Inflation exported from the US will come back to haunt it

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In an interview on Bloomberg, Andy Xie explains how US stimulus is causing inflation in emerging markets and how this will be re-exported back to the US via higher commodity prices.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Before you scream traitors, please bear in mind it’s only natural that capital seeks growth, real growth that comes from either productivity or population growth. And within the developed economies, both are in short supply. Japan’s stagnation is NOT due to any policy failure or “stimulus not big enough”, but rather because it has seen both peak productivity and declining population.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

These words are so true. I have blogged about wage increases in all kind of places before.

However, he then went on to explain how unemployment will not be able to check this imported inflation, and here’s where I disagree with him. While I do believe in imported inflation for the matured economies, I don’t think the workers in these economies are in a position to bargain for wage increases. Instead, inflation will have a double whammy on the average Joes as their assets prices and wages keep falling while everyday living expenses increase. The only spin you can put on this nightmarish scenario is that being squeezed on both sides, the painful adjustment will be quicker, or as Xie put:

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes.

It is a long and painful process for the West. And there is no way around it.


Written by Cindy Luk

August 19, 2010 at 3:14 am

China’s share of global GDP

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Why is China overtaking Japan to be the 2nd largest economy newsworthy? But for some strange reason, it’s all over the place, some more interesting than others. The Economist has recycled Angus Maddison’s data to give some historical background.

As to The Economist’s rhetorical question,

China and India were the biggest economies in the world for almost all of the past 2000 years. Why they fell so far behind may be more of a mystery than why they are currently flourishing.

many readers have resorted to a chicken and egg answer: that China and India had the biggest populations. Hello! Doesn’t having a large population in an agrarian economy in and of itself suggests higher productivity (due to whatever reason), and hence more surplus? Chinese population was almost HALVED after the fall of the Eastern Han Dynasty in 220CE. There were numerous accounts of the horrendous famines and population loss in the early 17th century, before the fall of Ming. So it’s in fact large economies that make large populations sustainable, instead of the other way round.

As to China and India’s sudden fall from the first league, the quick and easy answer is colonialism, which I think is wrong again in terms of cause and effect. Colonialism is like germs that populate our living world. It simply invades countries that have been weakened by other reasons. By the 19th century, China was already in her dying throbs. As such, the GDP share seems like a lagging indicator of a nation’s economic wellbeing.

One of the best books that deal with this fascinating topic is The Great Divergence, by Kenneth Promeranz. Mind you, the writing is horrible, but it’s well worth the effort.

Written by Cindy Luk

August 18, 2010 at 2:33 am

Foxconn and rebalancing

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The rebalancing of Chinese economy is going on at warp speed.

On the heel of its wage concession, Foxconn, of the suicide fame, has announced ambitious plans to relocate inland. A brand new plant at Henan, China’s most populous province, is slated to create 300,000 positions when it comes fully onstream. Existing facilities at Tianjin in the North and Chongqing in the Southwest are also undergoing major renovation and expansion.

Most western commentators, like the FT here, automatically assume that the relocation is to take advantage of wage disparity between the inland regions and Shenzhen. However, wages at Foxconn Henan, are reported to be at par with that of Shenzhen. What motivate Foxconn apparently is a slew of other incentives and government regulations, for example, its Chongqing plant will operate without the obligatory dormitory which has become the hallmark of many an exporters’ town. A new generation of workers prefer to churn out iPods at their home provinces and relax in their own homes after work.

But the FT is right in noting that wealth is being spread more widely within the nation and the expected climb in value-chain:

Starting with Japan, country after country grew rich by following the same playbook: step on to the lowest, dreariest and most labour-intensive rung of industrialisation and gradually move up the value chain as you build up skills and capital, letting poorer countries take on the tasks you shed. This is how the “Asian tigers” copied Japan, and how successive generations – including China itself – followed. The current relocations are no less momentous for happening within a single country.

In fact, there has been rumor that Foxconn has been effectively pushed out of Shenzhen by the local government to make way for a car manufacturer. China’s game plan for the coast is to upgrade to higher value-added manufacturing and service. To encourage automation, the government has offered tax incentives for capital goods. Japan’s relatively robust recovery in this current round of malaise is largely riding on Chinese demand for advanced machinery. Reuters has a good article on the expected beneficiaries of this automation drive.

“The automation equipment industry is growing very, very fast. Sensors, frequency converters, conveyor belts, pneumatic systems, power tools — you name it,” said Raymond Tsang, head of consultancy Bain & Co’s Greater China industrial practice.

“We’re seeing anywhere between 20 to 30 percent growth in those sectors year over year.”

According to Nomura Securities, the ratio of machine tools in China that use numerical controls, a good measure of the level of automation, climbed to 27 percent in the quarter to May, up from 22 percent in 2009 and 19 percent in 2008.

This brings China to the level of Japan in the 1980s when it was in still in a phase of strong economic growth. Japan’s numerical control ratio has since risen to a world-leading 82 percent, offering a glimpse of where China may be headed as its economy develops.

Bottom line, the look of Chinese industries and societies is changing rapidly. China participates in the global extend and pretend game basically to buy time for this transformation. However, given the likelihood of a double-dip, there just may not be enough time even with China’s astonishing speed.

Written by Cindy Luk

June 29, 2010 at 11:01 pm

Chinese labor disputes and consumption

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The AP has a nice article on the recent labor disputes, in the context of the transition of Chinese economy.

Boosting wages fits in with Beijing’s strategy of closing the income gap and promoting more equal growth in coming years, said Liu Shanying, an analyst at the Chinese Academy of Social Sciences’ Institute of Political Science in Beijing.

“If incomes won’t go up, how can domestic demand be boosted? Strikes for better pay are very much in line with the big trend of Chinese economic development,” he said.

One reason behind the more assertive work force is a shifting job market since China pumped up its economy with massive stimulus spending to fend off the global recession. Manufacturing has begun to expand into the Chinese interior, leaving traditional industrial enclaves on the coast competing for labor and giving workers a stronger bargaining position.

Workers “have the upper hand, and also sense the government is trying to address inequalities, so the workers feel more comfortable in pushing for high wages,” said Lee. [Chang-Hee Lee, a specialist on industrial relations at the International Labour Organization’s Beijing office.]

As I said before, all these are part and parcel of China’s push to rebalance its economy geographically (away from the Eastern coast) and structurally (towards households and consumption). Therefore, China is going down the path of internal revaluation rather than external adjustment via the currency. As a result, we are going to see an explosion of Chinese consumption in the coming decade. But GDP is likely to be more moderated. There already have been discussions on the viability of the current 8% “minimum growth target”. Not that China needs that high a growth rate anymore, with less people entering the workforce due to changes in demographics.

Does this mean the recent change in currency regime is nothing but a hoax? Yes if you are an exporter competing against China. But for China, this is just a necessary step towards turning the RMB into a reserve currency in the future. With substantial internal revaluation and the elimination of many export subsidies, some punters are already calling the RMB overvalued. Li Dao-kui, a member of the Chinese Monetary Policy Committee, suggested that it would take the RMB 10-15 years to be fully convertible and competitive as a reserve currency.

Written by Cindy Luk

June 27, 2010 at 9:31 pm

The real Chinese revaluation story

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The media has been busy propagating and debunking the RMB revaluation story, but I think both narratives are off-target. Yes, China is having a significant revalution, just not with its currency.

Instead, China has chosen an aggressive program of internal revaluation, i.e. raising costs for the exporters internally, by inducing wage-led inflation, cutting export subsidies, and stiffening environmental regulations etc.

Most of the recent coverage of China’s labor disputes have focused on the workers’ being simply more demanding in sharing the spoils. But one should also note the subtle, and very important, support that the Chinese government is giving them. Besides rallying behind the workers in state media, labor activists have been allowed to organize freely (rare for China’s pro-capital government), so long that they train the target on wage demand only. Raising the minimum wage is also a cue for the workers that their action is being sanctioned by the state.

Why is China going this route instead of currency appreciation recommended by the developed economies? Well, this is simply a better way of adjustment for China. With currency appreciation, the losses to Chinese exporters become gains for exporters in other countries, i.e. a net loss of wealth for China. With internal revaluation, the benefits go towards Chinese workers, i.e. only a redistribution of wealth within China. This later approach also helps in building up a middle class and reorient the economy towards more consumption.

Another way to achieve internal revaluation is by cutting export subsidies. China has announced cutting export rebates on over 400 types of products deemed energy-intensive or polluting. This allows the government to target only industries deemed inefficient and force them to upgrade, and helps soothing trade relations with the West as a bonus.

The implementation of environmental regulations has also been tightened, to the benefits of future generations of Chinese. Again, this is an area that simple currency appreciation may not be as effective.

At the end of the day, although China has decided to bite the bullet and pony up for rebalancing its economy, it still seeks to minimize the costs and maximize the benefits. It’s just that their preferred method may not be the most desirable one from the POV of the developed economies.

Written by Cindy Luk

June 24, 2010 at 5:17 am

Impact of higher Chinese wages

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The successes of workers at Foxconn and Honda, coupled with tacit support from a Chinese government determined to build a domestic market, have predictably embolden workers elsewhere. What’s surprising is the speed and ferocity of the spread of the labor unrest.

Besides a second strike at Honda, there are many copycat strikes in Guangdong and in the Yangtze River Delta to the north. To the dismay of many foreign investors, the unrest has even touched provinces like Jiangxi and Shaanxi,  inland areas that previously were considered as possible sites for relocation in order to lower costs. Now they are investigating opportunities at other countries. Foxconn is looking at India, and Vietnam is already a hot destination for lower end manufacturers.

So, does this mean China’s days as world’s factory is numbered? Not likely, as labor make up only a small portion (7% by some estimate) of total costs. The lower end manufacturers are likely going to move elsewhere, and the rest simply are going to move up the value chain, following the same path of Asian tigers like Taiwan and South Korea.

Is iPod going up in price? I doubt it. Foxconn and other manufacturers are just going to eat up the wage hike. Low end manufacturers have slimmer profit margin for cost absorption. But I think they will eventually opt to move out of China to the next low cost mecca rather than raising prices collectively.

Is this going to be a boom to workers in the developed economies? Hello! What have you been drinking? The Chinese are moving UP the value chain, which means that they are going to compete head-to-head with the developed economies which have already reached peak productivity. Feel free to ask Siemens whether the rise of Chinese high-speed train manufacturers is good for their business or not, or quiz Japanese car manufacturers on the impact of Kia and Hyundai.

Hey, Chinese workers with higher income are going to consume more, benefiting some international suppliers eventually, right? Right. But they also consume more natural resources, driving up the costs of practically every commodity. Plus the Chinese market is very difficult to penetrate and China runs explicit industrial policies to promote domestic companies. Japan is exhibit A of how powerful these non-tariff trade barriers can be.

Bottom line is, I just don’t get the euphoria of many western commentators.

Written by Cindy Luk

June 11, 2010 at 5:55 am

What have the US-China talks achieved?

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The so-called Sino-American Strategic and Economic Dialogue has been properly wrapped up, with a plethora of agreements signed. But what has it actually achieved? Probably not much, as usual.

Rmb revaluation has been relegated to the back burner, as expected. The two nations have agreed to:

  1. Balance their respective economies, with the US increasing savings (you don’t really think this is going to happen, do you?) and China increasing consumption (even if they do succeed, this will be a decade-long project at best).
  2. Fair trade. The US has promised to consider recognizing China as a market economy, and China is to give equal access to foreign companies (presumably in government purchases). This is potentially the most important result coming from the talks, and I’ll come back to this later.
  3. Some sort of vague cooperation in the financial field.
  4. blah, blah, blah
  5. They agree to talk some more in the future.

That’s about it in trade related results. There are some other stuff regarding new energy and geopolitics etc.

On the fair trade agreement, what the US has promised potentially has important impact on many anti-dumping cases where “Chinese real wages” are often imputed from other economies as China is currently not considered a market economy. If this is to be implemented, Commerce Dept. will have much higher burden of proof in anti-dumping cases that it initiates. Is this likely to happen? I’m not holding my breath. The current economic environment really is not exactly conductive to lessening trade tensions. Unless the US is thinking about imposing overt tariff, it is not likely to weaken the power of its anti-dumping mechanism. The keyword in the agreement is “promised”. It’s going to be a long and convoluted way to actual implementation, if at all.

On the Chinese front, it’s all promises as well. US companies have protested vehemently about China’s “indigenous rule”, devised to promote domestic technologies. Since China has never signed up to the WTO treaty that gives equal access in governmental access, the US has to use other leverage. China has since modified the rule, but the devil is in the details. Since China sees creativity, or rather the lack of which, as a national, strategic issue, I doubt it’s going to backtrack on the core pieces of the new rule. An official has clarified earlier this week that only value-added portions carried out within China by a foreign company will be considered as national in doling out governmental purchases. In other words, if you want to be considered a domestic company, you need to manufacture and carry out key R&D in China.

Written by Cindy Luk

May 26, 2010 at 3:31 am