When labor is not labor

Naked Capitalism has highlighted a piece on the NYT  about protesting ex-bank workers. The article itself wasn’t too bad by NYT standard despite snides about poor divorced protester moving to Beijing to be “closer to the country’s leaders” and other useless commentaries. The interpretation by Yves Smith, though, is completely off by suggesting “the futility of labor action against entities near and dear to the officialdom”.

Yes, Honda and Foxconn are foreign-owned (btw, the Chinese do not see Taiwanese as foreign), and strikes against them had subtle governmental support. But could there be other reasons behind this difference in tolerance? Things like:

1. The southern manufacturers with “approved” strikes are mainly exporters, while the banks focus on domestic market.
2. Workers at the southern manufacturers are mostly young, unskilled country migrants while the ex-bank employees are middle-aged, effectively unskilled, officially city dwellers.
3. Raising the wages of the unskilled migrants force the exporters to be more competitive while the banks need to reduce their bloated headcounts to be efficient.
4. Raising wages for migrants helps rebalancing the Chinese economy and builds a middle class, while rehiring the ex-bank employees will…hmm…make their lives better.

Whatever you think of firing these middle-aged people with no real marketable skills, the fact remains that there is economic rationale behind stonewalling their efforts and supporting the cause of the migrant strikers. Whether national policy should be determined solely by economic considerations is another issue though.

Impact of the European crisis on China

While the endless rounds of flip-flops are entertaining in a wicked way, it will be stupid to treat the European crisis as just a reality show. For one thing, the EU, rather than the US, is China’s largest export market, and exporters are already howling from the pain of an effective 14.5% currency appreciation in 4 months against the euro.

What else? Most have given up on any prospect of immediate revaluation of the RMB. The US is already harping a different tone regarding currency ahead of the Sino-American Strategic and Economic Dialogue next week. There are also stories of hot money outflow. Michael Pettis rambles on the prospect of more trade conflicts, perhaps even in the form of tariffs. Shocking! Economic basket case resorts to beggar-thy-neighbor policies and trade conflicts (or any sort of conflicts) intensify during hard times. What’s more interesting is actually at the end of the post, almost as an afterthought, he suggests that China might be able to mitigate the risk by buying euros.

By the way is there anything that China can do to head off conflict?  Yes.  It can buy euros, the more the better –just lift every offer out there.  By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China.  Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.

I know, I know, China had just sold its euro bonds and parked the money in dollar, as per the most recent TIC data. But I still think this scenario is more than feasible. When the crescendo calling for RMB revaluation was at its loudest, western media were full of quotes from “Chinese experts” that seem to readily acquiesce to RMB appreciation. However, when you actually look at their speech, preferably in the original, what those people are advocating is a reform of the currency management mechanism rather than straight appreciation per se. One term that pops up very often is “basket of currencies”, i.e. replacing the USD reference with a secretive brew of multiple currencies, a la Singapore. Li Daokui, member of the monetary policy committee of the PBoC is flogging the basket of currencies idea these days. A central government think tank is also calling for breaking the “predictable path of currency movement”.

In this sense, the current dollar strength actually gives China good cover to carry out with the proposed reform. Instead of maintaining a hard peg with the dollar, China can intervene by buying up some euros, and selling from its dollar reserves to pay for it of course. This diversification will help to halt the RMB’s appreciation against the euro and will appease to US cries for stronger RMB. Parking your wealth in the bunds is way safer than the treasuries, if you ask me.

The natural implication of this change in regime is an inevitable rise in US interest rate. When you have a buyer boycott, it is possible to have higher interest rate despite hollowing deflation. China has not withdrawn her money from the Bank of the US so far, only because it has nowhere else to go. After a substantial fall in the euro, and most of Europe’s problems priced in, things might look quite different.

The irony of it, should it materializes, is that the RMB might appreciate against the dollar just when about everyone has written it off, and those that pushed for it might live to regret it.

Another instant China expert

This is the reason I started this blog. Western media are full of “China experts” who can’t locate it on a map!

You know this is written by a clueless dude almost from the first sentence.

For years, Chinese economists have advocated liberalizing the exchange rate and allowing it to rise, weaning the country off its addiction to exports.

Really? Which Chinese economist to be precise? And what about those who think China should just give a finger? Have they all been exiled to Alaska? Now, if the US is willing to cede Alaska, maybe there’s a deal. But mind you, nobody wants California though.

ambitious provincial politicians such as Bo Xilai, the party boss in the western city of Chongqing, may defy the central government. If he wants bank loans to build popular projects such as affordable housing, it may be hard to stop him.

Jeez, what has this guy been smoking? Chen Liangyu, the party boss of Shanghai (which btw, is China’s commercial capital. I doubt Sebastian Mallaby knows it though) tried to stonewall the central government’s push to dampen the property market in 2006. Instead of being just the boss of a hinterland city, that guy actually sat on the Poliburo! What happened to him? How does 18 years prison term sound?

Now, of course, if you’re really bored, you can take all this as playing the “spot an idiot”game. If you use China and economics as the twin parameters, it’s really easy to win:)

Seems like Stephen Roach is also having fun playing this game, via Zero Hedge.