Firstly let me apologize to my readers for the slight absence in publishing.
China and the World Economy
Have you noticed that figures coming out of China show a trend that varies with conventional wisdom. Inflation in China is a force that the Chinese government mentions and tries to combat. You don’t hear about that problem elsewhere. Europe and the USA are battling economic weakness and interest rates remain very depressed.
Yet China is battling inflation.
Have you noticed that many other countries from South America to Asia are now producing products at competitive prices, while China is fighting to stay competitive? Have you noticed that the enormous imbalance between Chinese imports and Chinese exports is moderating? Have you noticed that even in the USA, manufacturing is surging?
Economic Cycles
As with all economic miracles and economic cycles, each cycle comes to an end. We refer you to our blog of March 2011 wherein we spoke about economic cycles and what to expect. In every cycle what seems to be inevitable or widely accepted as fact, turns out to be just a feature of that particular cycle.
One must keep in perspective that the obvious is not necessary the long term truth and is not necessarily long term reality.
Japan of the 1980’s
A very vivid illustration is Japan in the 1980’s. The economic miracle of Japan, when Japanese were traveling the world and buying up assets in North America, Europe and elsewhere. We published an interesting analogy in 2010, where we pointed out that the unstoppable economic colossus that was Japan was feared everywhere, and it was thought that Japan was taking over the economic world.
It turned out to be far from the truth.
China will turn out the same. The economic powerhouse that is the USA will remain the strongest and China will join the group of modern economically strong countries.
The following is an interesting article that we re-publish as an illustration.
The End Of Cheap China, March 9, 2012By Sydra Farooqui
TRAVEL by ferry from Hong Kong to Shenzhen, in one of the regions that makes China the workshop of the world, and an enormous billboard greets you: “Time is Money, Efficiency is Life”.
China is the world’s largest manufacturing power. Its output of televisions, smartphones, steel pipes and other things you can drop on your foot surpassed America’s in 2010. China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.
Costs are soaring, starting in the coastal provinces where factories have historically clustered. Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour.
On March 5th Standard Chartered, an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple’s iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month.
“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles. China’s coastal provinces are losing their power to suck workers out of the hinterland. These migrant workers often go home during the Chinese New Year break. In previous years 95% of Mr Weathington’s staff returned. This year only 85% did.
The article goes on to describe similar effects on a number of other Chinese manufacturers. On the other hand, the loss of cheap labour in China is resulting in more mechanisation, more efficiencies, and more robotics amoung other improvements.
China will not disappear. It has become one of the world’s economic powerhouses, and there it will stay.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
