The People's Republic of China (PRC), commonly known as China, is the most populous state in the world with over 1.3 billion people and with approximately 9.6 million square kilometers (3.7 million square miles), the PRC is the world's third- or fourth-largest country by total area, depending on the definition of what is included in that total,and the second largest by land area. Also, China is the second largest economy in the world. Due to its magnitude in land size and access to labor force, China has become a dominant monster in the manufacturing world and became the ipso facto cheap factory to the world. Eventhough many economists still view China's dominance in the manufacturing world for many years to come, I think that the rules of the game have changed and we all need to take notice and prepare for the changes.
As costs go up in China, they charge more for products and that means Americans pay more. Over the past 12 months, prices of things the U.S. imported from China, are up 2.8 percent. But five years ago, the price of Chinese imports were actually falling. Basically, for the most of the past decade, economic forces for abroad were pushing down prices in the United States. Millions of low-wage Chinese, Indian, Eastern European workers came into the global labor market. This competition reduced costs of stuff we bought. The pressure on U.S. firms was to get more efficient. It all added up to essentially importing falling prices from abroad.
The fact is that China's rising prices means the end of "cheap crap" that many times have flooded many countries and in many cases destroyed good quality local manufacturing. Another trend that you will see is the increasing number of companies leaving China for other developing countries in Asia. Manufacturers are looking beyond China because China is no longer the cheapest place to manufacture. Due to the increase in labor costs in China, manufacturing prices are rising; quality stays in the same place. In an FT.com article by Josh Noble, entitled, "The end of cheap: China's tipping point," a number of economists theorize that China's demographics have changed such that we should continue to expect China's wages to rise and its manufacturing to decline. An FT Tilt (a new FT site focusing on emerging markets) article by Hannah Kuchler, entitled, "Coach the latest to cut China production," highlights a number of foreign companies reducing their China manufacturing.
Coach is the latest company to move production out of China as labour costs rise, with a plan to cut its manufacturing in the country from about 85 per cent of its total to 40-50 per cent over the next five years. The US-listed leather goods company follows companies from Esprit to Canon which are shifting from using China as a manufacturing hub to seeing it as a major consumer market. Lew Frankfort, chief executive of Coach, said rapid income increases in China meant the company is beginning to move production to less expensive Asian countries like India, Vietnam and the Philippines. Southeast Asian countries are increasingly used as cheaper alternatives for labor-intensive manufacturing.
The article concludes by mentioning a recent Boston Consulting Group report that asserts "that by 2015, strong productivity and relatively low wages would help the US move ahead of China as a base for making goods which will be sold in North America." I think we will see an increase in "Made in the USA" sooner than later.
People will notice that electronic labels no longer always will say "Made in China" on them. Vietnam, Thailand, Indonesia, Malaysia, even Bangladesh are popping up more frequently on the backs of cameras, computers, TVs and shirts, as labour costs rise on the mainland, and as smaller southeast Asian countries get their act together to stake a larger slice of the global supply chain. Vietnam in recent years has attracted the likes of Mitsubishi Heavy Industries Aerospace, Kobe Steel, Microsoft, Intel and Canon, as well as Japanese cosmetics maker Shiseido.
The problems for China is not limited to the increase in labor cost. In February of this year, China’s central bank raised its reserve requirement ratio (RRR) for banks by 50 basis points (0.5%), the second hike this year, in a further move to combat inflation. By incrementally raising interest rates and reserve requirement ratio for banks, China has slowed down its inflation rate but only modestly. However, many reports are showing that food costs have doubled in many place in China which makes it harder on average families to make ends meet. Prices of high-end condos have also doubled which has in turn raised real estate prices in China and making more costly for families to live in the commerce and more who nearly lost power in 1989 in part due to anger over rising inflation that fueled the Tiananmen protests. In January 2011, consumer price index rose by 4.9 percent over the same period of the previous year. Of which, urban area and rural area was up by 4.8 percent and 5.2 percent respectively; the price of foodstuff, non-foodstuff, consumable and services expanded 10.3, 2.6, 5.0 and 4.6 percent respectively. Compared with December 2010, CPI increased 1.0 percent. The price of foodstuff climbed 2.8 percent.
Another point to add to the inflationary issue of China is that in January 2011 the level of bank deposits were down. Dong Tao at Credit Suisse says that this is the first time this has happened since January 2002. What was more concerning was that it was corporate deposits that went backwards, not household deposits, as may have been expected around Chinese New Year. This gives us reason to believe that the fall in deposits is not seasonal.
Add to this the increase in fuel costs which has impacted China's busiest container port, making China’s inflation problem an obstacle to global trade. Incensed by spiking fuel costs and consumer prices, truck drivers hauling goods to and from the Port of Shanghai went on strike in April, triggering a major confrontation that drew hundreds of police officers after truckers reportedly blockaded the entrance to a local logistics company.
China has been slow to take the step that would strike most directly at its inflation rate: allowing its currency to appreciate. China kept its currency artificially low to reduce manufacturer’s costs and keep the country’s massive export sector competitive. This requires China to continually buy U.S. dollars and issue more yuan, a policy that expands domestic money supply and fuels inflation pressure. Rapid growth and inflation in China and other emerging markets also pose a serious challenge to policy-makers in advanced economies. Already trembling under the burden of mounting debt, many countries in the Western world are facing tough decisions over spending cuts sooner than they expected. China’s slow efforts to keep a lid on runaway growth have so far only contributed to those problems, as that nation’s inflationary pressures lead to more price increases around the world. There are also dangers if China’s slowdown comes too quickly: A significant curtailing of growth threatens to drive down commodity prices and foreign investment, pushing many advanced economies back into trouble. But those broader concerns are taking a back seat to the striking truck drivers, who are growing increasingly frustrated with the rising cost of living.
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