At first I couldn’t believe my ears: a U.S. manufacturer was telling me that they were planning on fleeing the high costs of Chinese manufacturing for the relatively lower costs of the U.S.
It’s been years since I heard anyone credibly claim that they could save money by moving manufacturing to the U.S., but just last week I met with a manufacturing CEO who was certain 2012 would be the year they outsourced to the U.S.
I was surprised with the textbook microeconomic explanation of why this manufacturer was leaving China for the U.S.
Long and inflexible supply lines are causing the company, which manufactures replacement industrial refrigerator parts, to finance and store large amounts of goods. High-energy prices are causing trans-Pacific transportation costs to skyrocket. And, the not so hidden expense and personal sacrifice needed to manage a large staff 8,000 miles away have worn down the CEO.
Management now believes Chinese manufacturing isn’t a financial elixir and is hurting their ability to service customers. The deal was sealed when Chinese inflation eroded whatever remaining financial benefit remained and civil unrest terrified visiting employees.
Instead of continuing down the Chinese rabbit hole, the CEO is working on a plan to transport his machine tools to a newly purchased manufacturing plant in South Florida. With a modest capital investment, he believes that 10 U.S. workers will be able to manufacturer as much as 50 Chinese workers.
Even better, by manufacturing in the U.S. the company will improve customer service and the personal wear and tear not of trying to control quality in a manufacturing operation located in the middle of China will simply disappear.
The CEO is highly motivated and very smart. His company is growing more than 50% per year and is very profitable. The company generates high margins by packaging the delivery and installation of a basic industrial consumable with superior customer service and customized installation.
In the big scheme of things, one company moving their manufacturing to the U.S. doesn’t mean much, but after listening to this CEO, and talking to scores of others, it’s clear that the Chinese advantage is being eroded by high domestic inflation, rising energy prices and an increasingly unstable civil environment. Given the choice of having to commute to China or stay in the U.S., the U.S. wins every time.
There is a lot of speculation that the dollar is losing ground to the Chinese renminbi and that sooner or later the Fed will share the global stage with Chinese monetary authorities. Chinese government officials and Jeremiad western economic forecasters who claim that the renminbi will replace the dollar as the world’s premier currency certainly have not helped assuage American fears.
However, contrary to the increasingly shared belief that the Chinese are coming, the dollar’s status is not in danger nor is the renminbi a realistic hard currency alternative.
OK…I confess…James Sunshine is my son. He is a freshman at Emory University and wrote the below op/ed for the Emory Wheel. Of course I am very proud of his work. He says that he writes better than his Dad and that he is smarter. What do you think? He may be right!!
As the national debt becomes a hot topic for political chatter, China looms larger than ever. Meanwhile, opportunists of all political stripes scream that we are indebting ourselves to an emerging economic and military power. We have, in their eyes, fallen into China’s trap. What this too-common view ignores is this vital truth: In our economic relationship with China, we are still the alpha dog.
True, the national debt is hovering around $11 trillion and increasing — and as the debt increases, China acquires even more of that new debt. But while these numbers sound troubling, they are not nearly as worrisome as fiscal disciplinarians would have you believe. Their fears stem from a general misunderstanding about how this nation sells its debt, as well as China’s purpose in buying it.
Most who pay attention to politics and policy have a basic, rough understanding of how our government sells off debt: the Department of the Treasury holds debt auctions at several points during the year, at which point private investors, insurance companies, funds, the Federal Reserve itself and foreign governments have the ability to buy our debt in the form of treasury bonds to be paid back with interest at a certain point in the future.
This is the common misunderstanding. In fact, debt is something that you can literally grasp. If you have a dollar in your pocket, you are holding a portion of the national debt. It says that the U.S. Treasury will guarantee the value of that dollar to however much it is worth. Fiscal disciplinarians and demagogues screaming about the debt would like you to believe that a majority of our debt sales go to nations our population views as rivals, such as China. But in fact, only a little less than a quarter of our debt is held by any foreign central bank; the Federal Reserve holds a little less than half. We still hold most of the cards.
Meanwhile, China is somewhat enslaved by our debt. The structure of their economy requires them to continue to buy our debt without demanding their money back. The Chinese Central Bank can never, at least while their economy is export-oriented, sell our debt. If tomorrow the Chinese Central Bank were to sell off all of its U.S. Treasury bonds, it would mean that they would be converting most if not all of their dollars into their own base currency, the yuan.
Their economy would tank overnight. While they would sell off all of their dollar reserves, thus deflating the price of the dollar, they would at the same time increase the value of the yuan — a disastrous result for China, as higher-priced currency means that fewer nations would be able to afford Chinese exported goods — including the United States, whose currency China would have just deflated. It doesn’t help to bankrupt your best customer.
While China would be able to afford more imported goods, unfortunately for them they have no real domestic demand. The same logic could also be applied to why China won’t stop buying our debt. If they were to stop, then our dollar would be deflated in relationship with the yuan, and they would be unable to sell us as much cheap goods as their “growing” economy requires.
So why all the fear from media pundits and politicians, if the calculations and odds are still in America’s favor? It’s somewhat psychological as well as political. Even I must admit that $11 trillion isn’t chump change, and most American’s don’t have enough time or patience to get a real crash course in how our Federal Reserve and Treasury work. This makes the issue easy political points for whichever party happens to be in the opposition — all to scare the next Joe the Plumber into supporting their candidates.
On April 16th the China National Bureau of Statistics (the “NBS”) announced with great fanfare that the Chinese economy was special because even in the face of an emerging global depression China was able to continue to grow at a rapid pace in the first quarter of 2008. According to Chinese officials, the headline Chinese first quarter 2009 growth rate was 6.1% which is an economic miracle given an estimated 25% fall off in exports, a drop in most industrial production numbers (including electric production) and what appears to be a collapse of the real estate sector (as evidenced by real estate deflation and high urban commercial real estate vacancy rates).
I was not surprised by Chinese officials saying things are OK in China. What surprises me, however, is the lack of critical analysis of the Chinese GDP numbers by Western economists and media. In the last two weeks most economists have accepted the first quarter 6.1% growth number as gospel and cite it as a reason that the global economy may recover. Instead of being an economic problem, there is a growing consensus that China will be the economic engine that pulls the global economy out of its ditch. Goldman Sachs even raised their forecast for 2009 Chinese GDP growth from approximately 6% to 8.3% and seems to have applied for full membership Chinese Communist Party (“CCP”) membership by reciting the “party line” about how and why China is different from everyone else. The problem is that Chinese GDP numbers don’t match the hype and when critically analyzed or compared to previous NBS statistics show some serious problems and inconsistencies.
Set forth below are some NBS statistics. It isn’t easy to get the data because the English NBS web site doesn’t include historical numbers that would allow a western researcher to easily reconcile their current growth claims.
Based upon the above statistics, fourth quarter 2008 GDP was 9.91 trillion Yuan (calculated by subtracting 9 month GDP from full year GDP). But, first quarter GDP was 6.57 trillion Yuan which is a lot lower than the fourth quarter of 2008. It seems, based upon NBS numbers, that growth didn’t occur in 2009 even though they claim it did. The numbers obviously don’t reconcile, which is the point of my concern.
Chinese leaders are trying to avoid reporting that Chinese GDP is falling just like GDP in the rest of the world. They seem to be obfuscating this unfortunate fact with a barrage of inconsistently calculated and reported numbers. The industrial production numbers, export numbers, agricultural numbers and real estate data don’t add up to a growing economy. I estimate that domestic consumption would have had to grow by around 20% to produce 6.1% first quarter growth (not year on year growth but actual growth during the first quarter). And, given rising unemployment caused by the Chinese export crash it isn’t likely that Chinese consumers are increasing spending like a bunch of drunken Americans.
Western press accounts are distorting the Chinese economic statistics. For example, in an article discussing how the newest Chinese GDP data was providing encouragement to economists, the Wall Street Journal reported that “growth in gross domestic product came in at just 6.1% in the first quarter; at best a wrong statement. On April 16th the Wall Street Journal corrected its previous reporting error when it wrote” Breaking down the GDP figures relative to the previous quarter…[is] how most developed economies report their economic data…China’s 6.1% figure for the first quarter of 2009, because it is a comparison only with the year-earlier period, doesn’t clearly show how the economy is doing relative to the onset of the crisis late last year.
The New York Times did a better job reporting Chinese GDP and Floyd Norris actually compared Chinese economic growth claims against Chinese electric production (a comparison I agree with) and questioned whether or not China’s GDP claims are true. Mr. Norris pointed out that electrical use in China was down for the first two months of 2009 by 9.2% which is inconsistent with any level of GDP growth. As an aside, according to Chinese government sources subsequently stated electrical use rebounded in March but remained down 4% for the quarter which is a quarterly number that seems too good to be true after the first two months being down 9.2%.
While the New York Times more or less got the story right on Chinese GDP growth, most other media institutions, like the LA Times, misreported the data. And, no major media source has run a front page “above the fold” story on whether or not Chinese government data is misleading. Everyone is just more or less accepting what the CCP is dishing out.
I am pretty sure that by the end of 2009 Chinese official statistics will end up “proving” that the Chinese spirit is stronger than the rest of the world and that the economy grew at a rate close to 8%. After all, the Chinese leaders all but guaranteed continued economic growth at around 8% and they will deliver that number, no matter what it takes. But, Western economists and media analysts need to be a little more careful about reporting Chinese “facts”. Otherwise Western policymakers and business leaders will make tragic Chinese policy errors based upon a bad understanding of the Chinese economy.
There is mounting evidence that a freely floating Chinese currency will actually drop in value and make Chinese exports cheaper. In his confirmation hearings, Tim Geithner espoused the U.S. “Conventional Wisdom” that China is an unfair trade competitor because it manipulates its currency down in value so that its exports are artificially cheap. The Conventional Wisdom is that a freely floating Yuan will increase in value making Chinese goods more expensive and helping U.S. manufacturers. But, what if Geithner is wrong and a freely exchangeable Yuan does the opposite of what everyone expects?
Geithner is definitely correct when he says that the Chinese are currency manipulators. After all, the Chinese government decides on Yuan-Dollar exchange rates, and then uses currency controls to ensure that targets are achieved. But, what is unclear is that a freely floating and exchangeable Yuan will increase in value.
The principal evidence supporting Geithner’s view that the Yuan is too cheap is that United States manufacturers have been losing business to Chinese manufacturers for a long time. Economists that support Geithner’s position point to persistent Chinese trade surpluses and conclude that currency manipulation must be taking place. However, a large current account surplus isn’t in of itself sufficient to cause the Yuan to appreciate. For the Yuan to increase in value, investors and Chinese citizens still must want to own Yuan rather than Dollars, Yen or Euros.
Yuan appreciation advocates ignore underlying economic reasons that make Chinese goods cheap — like near slave wages, cost savings at the expense of the environment, poor worker safety and cheap land. On Sunday, February 1st, the London Times reported
“…a growing number of economists say…that it is not the exchange rate but years of sweatshop wages and income inequality in China that have distorted global competition and stifled domestic demand.”
China critics who accuse the government of being an unfair trade competitor through currency manipulation disregard other facts suggesting China’s currency is overvalued and maybe by a lot.
First, a prerequisite for a strong currency is a strong government that is able to maintain social order. The Sunday London Times article, Violent unrest rocks China as crisis hits, describes labor unrest, riots, state censorship, violence and class warfare The unmistakable conclusion of the London Times article is that the fabric of Chinese society is starting to come apart. The article provides scary and credible details of scores of events that undercut the Western image of an all powerful Chinese government in control of society. The images presented by the London Times don’t provide a social backdrop for China which is a prerequisite for a strong Yuan.
Second, as reported by the New York Times, unemployment is soaring among migrant factory workers that make up the backbone of the Chinese manufacturing workforce. Rising unemployment and a crashing manufacturing sector aren’t typically indicators of a currency that is about to appreciate.
Third, investors have been fleeing China and the flow of export earnings into Yuan has slowed. As reported on February 2nd in the International Herald Tribune
“In Shanghai, cash-rich Chinese companies are buying high-yield bonds of American companies in distress, and bringing home fewer of the dollars they earn abroad from exports.
And in Hong Kong, wealthy Chinese from the mainland are turning up in growing numbers at jewelry stores here seeking one thing: diamonds, big ones…
… Chinese citizens are starting to send more money out of the country and overseas investors are pulling money out of China while slowing their pace of new investments.
China still has torrents of cash pouring in from trade surpluses, as imports shrank faster than exports in the final months of last year. But that inflow has been nearly balanced in recent months by an unexpected outflow of private cash from the mainland and a slowing of investment into the mainland.
Officials… have said conspicuously little about capital flight in recent weeks.”
A sure sign of an overvalued currency is capital flight. When investors, traders and citizens believe that a currency is sound, they do not flee to other currencies, gold, diamonds or U.S. junk bonds.
Fourth, many Sino experts believe that 30 years of currency controls have produced pent up demand in China’s new middle and upper class to invest outside of China. While some exporters and entrepreneurs have figured out ways to avoid government regulations and keep their profits outside of China, for the most part, foreign earnings have been brought back to China and converted into Yuan. However, if exporters were no longer compelled to convert their earnings to Yuan, and were allowed to freely invest outside of China, the floodgates would open and pent-up liquidity would pour out of China and into other currencies. And, the Yuan would depreciate in value.
Finally, Reuters reported on February 2nd that a Central Military Commission was convened and determined that there was “slack management” in some of the ranks of the People’s Liberation Army (“PLA”) and that “…[all] military forces should ensure that they “uncompromisingly obey the Party and Central Military Commission’s command at any time and under any circumstances”. The Commission was convened because China faces “…growing unrest and …“multiple security threats””. The Commission also called for “absolute obedience to the Communist Party”. The fact that the government needed to convene a military commission to make sure that the PLA obeys its orders is surprising. China has two major centers of power, the Chinese Communist Party and the PLA. The Commission’s statements indicate tension between the two organizations and the possibility of conflict within the Chinese establishment. Strong currencies don’t survive when the Army resists following the orders of civilian authorities.
Tim Geithner better hope he doesn’t get what he wants and that the Chinese don’t make the Yuan freely convertible or its crashing value may be an unwelcome surprise to the U.S. economy.
The Chinese economic miracle appears to be unraveling at an alarming and accelerating pace.
In just 30 years, China was able to transform its economy from a Marxist basket case to a global manufacturing powerhouse. But recent reports of massive plant closings, skyrocketing unemployment, plunging exports and growing social unrest are raising serious questions about China’s economic and political future.
The problem is that China’s export growth engine was built on four Chinese economic pillars — three of which no longer exist and may never return.
The four Chinese economic pillars:
1. Really cheap labor. First and foremost, the Chinese economic miracle was based upon really cheap labor. Initially, the cheapest labor, slave and child labor, drove low export prices. Over time cheap migrant labor from the Western regions of China replaced slaves and children.
But even migrant labor has gone up in price. In the beginning of 2008 new laws raised labor costs through minimum wage and other worker oriented standards. So, while Chinese labor is cheap by Western standards, it is no longer the cheapest for high volume, low-valued-added jobs.
2. No environmental protection. China had few environmental standards and in some areas has made its water and air virtually unable to sustain human life. By polluting its environment, China was able to gain a cost advantage over other manufacturing countries.
But China slowly poisoned its citizens, and in 2008, new environmental standards were imposed upon manufacturers that increased costs.
3. Cheap and abundant financing. The main market for many Chinese-produced consumer goods is outside of China. It is expensive, though, to ship goods from Chinese factories to overseas customers, and factories require financing from banks to cover these costs. For a long time such financing was cheap.
However, the global credit crisis has dried up bank loans and Chinese manufacturers are now scrambling for liquidity. Until cheap and abundant financing returns, it is going to be hard to finance a high volume of Chinese exports.
4. Low oil prices and unlimited energy. China uses materially more energy per unit of gross domestic product than the United States, Western Europe or Japan. China burns approximately 10 times the amount of energy to produce $1 of G.D.P. than Japan and 3 to 4 times the amount of the United States.
Energy is used for production and transportation, and when oil topped $140 per barrel, the effect on China’s exports was to dramatically increase costs relative to other countries. While oil is once again cheap and plentiful, current price levels may not last forever. If oil prices rise again the Chinese export sector will become less competitive relative to more well-developed economies.
The elimination of three of four Chinese economic pillars has critically wounded the Chinese economy.
In just the toy sector up to 2.0 million jobs may have been lost in recent months. And, the employment carnage doesn’t stop with toys; published reports of job losses vary widely but seem to converge on up to 10 million total jobs having been lost in export related manufacturing industries such as toys, shoes, textiles, steel, electronics and construction materials. American job losses seem almost irrelevant in comparison to Chinese labor market destruction.
The risk is that extreme economic hardship leads to gut wrenching and violent political change.
Unrest is increasing in China, but it isn’t being fully reported because of censorship according to media sources. All the while, the Hong Kong Western community has been buzzing about rumored eyewitness accounts of troop and riot police deployments in Guangdong province. And, it is widely anticipated that as plants close this week in anticipation of the Chinese New Year which starts on Monday a lot of them won’t reopen and there will be worker unrest among the newly unemployed.
I was recently in China and found that many of the Chinese people I spoke with are scared and worried that China’s best days are behind it, and that the standard of living for hundreds of millions of Chinese is about to drop below the poverty line. They fear that mass-starvation will lead to violent uprisings, perhaps directed at the rich “capitalists” in the country. Images of luxury malls in Beijing, skyscrapers in Shanghai and conspicuous consumption throughout the coastal region don’t play well to starving peasants who are still waiting for their turn at the rice bowl.
Around noontime on Sunday, I arrived in Beijing.After checking into the hotel, I decided to get some lunch where I was given today’s edition of China Daily, a.k.a., “The National English Language Newspaper,” established by the Communist Party in the 1980’s.According to the China Daily web site, it is the most authoritative and important English language news source on China.From the China Daily web site:
China Daily is one of the most authoritative providers of news and views in China.
The paper has an average daily circulation of more than 300,000 in about 150 countries and regions.
Two-thirds of China Daily’s worldwide readers are government officials, think-tanks and decision makers from multinational corporations.
Inside today’s China Daily there were two articles that I found interesting and instructive on current Chinese policy which appears to be in conflict with Western culture.
It is important for Westerners to understand the “why” behind Chinese words and policy and not just react based upon superficial analysis.When the global economy was rapidly growing it made little difference if the West understood the Chinese.The rising economic tide was “lifting all boats” and cultural sensitivity took a back seat to quick profits.But, just as falling tide lets everyone know “who is bathing naked,” a slowing global economy will inevitably create trade and political tensions.Western political and business leaders need to start listening carefully to Chinese leaders and try to understand the Chinese point of view.
While the U.S. is worried about its economic wellbeing, i.e., the relative affluence of its middle class, China is worried about survival; economic, physical and political survival.Mass starvation and civil unrest haunts China and is the national history that the leadership is trying to avoid repeating.
The first article that caught my eye was titled “Experts warn of damage by religious cults”.As it turns out, 2009 it the 10th anniversary of the Falungong crack down and, according to The Economist, Chinese government officials are worried about social unrest surrounding this anniversary.While it may be a coincidence that the Chinese government decided to have an international forum on destructive cults just before the 10th anniversary of the Falungong crack down, it is more likely that they are trying to prevent unrest and bloodshed through a Chinese version of education and communication.A few quotes from the article are set forth below.
Destructive cults are harming people and society by preaching extreme doctrines, devastating lives and livelihoods, and using violence and terrorist means to resist sanction, experts warned Friday.
The warning came at an international forum on cultic studies that opened in Shenzhen on Friday.
“New cults emerge widely in the world now, while due to some special defects of the cults, they easily turn destructive, and harm people and society,” said Zhang Xinying, secretary general of the Center for the Study of Destructive Cults at the Chinese Academy of Social Sciences.
“And Falungong is an organization like this, which is also agreed on by more and more people with insight from abroad,” Zhang said.
Rick Ross, an expert devoted to the study of destructive cults from New Jersey, US, said according to his communication with Falungong members, he noticed the members have three uniformed tendencies: racism and homophobia, medical neglect and protests.
Hmmm…racism, homophobia, medical neglect and protests.That isn’t how U.S. policy makers educate and communicate.But, the Chinese experience is different than the American experience and we cannot view Chinese public policy through the lens of liberal Western democracy.
But still, I wonder how Mr. Ross would view Chen Weihua, author of the next article that I noticed in the China Daily.
It’s really futile to debate over whether Chinese film star Zhang Ziyi should be condemned for sunbathing topless while frolicking with her Jewish boyfriend on the beach…
…We all know Zhang is serious about her relationship with the Jewish billionaire Vivi Nevo…
…Surely, it is not the first time some of our narrow-minded folks have felt nationalistic, or racist and sexist, as I would like to describe, when their beloved Chinese actress dates or marries a foreigner, or for that matter, even secures a foreign passport, as in the recent case of Gong Li.
Interracial relationships and marriages are bound to rise as China becomes more closely connected with the rest of the world…
…As we enter the Chinese Year of the Ox, let’s hope and pray Zhang and her Jewish fianc walk down the aisle, which Zhang has made it clear she intends to.
When we look at the photographs, why can’t we just see a couple in love, enjoying a sunny day on the beach?…
The photos, taken by a Los Angeles–based paparazzi agency, showed Zhang on the Caribbean island of St Barts with her fiance, Israeli investor Vivi Nevo, last Friday.
Obviously, Chinese state controlled media doesn’t understand that being Jewish isn’t in of itself a national or political identity.I doubt that Mr. Weihua intended offense.But, to Mr. Weihua Jews aren’t members of a religion but rather people with a political identity that transcends their nationality.As such, Mr. Weihua views Ziyi and Nevo through a distinctly Chinese lens that has been formed through the experiences of Falungong, Tibet and Communism.In China, religious groups have a political significance that more often than not has resulted in bloodshed.
By the way, if anyone has comments on Mr. Weihua’s article please feel free to e-mail them to chenweihua@chinadaily.com.cn or post them to the China Daily web site.It can’t hurt to provide a Western viewpoint.But please remember, Mr. Weihua probably meant no harm.
Politics are almost everything in China.Economics are determined by politics.Industrial policy is determined by politics.And, national fiscal and competitive policy is determined by politics. When western business and financial leaders ignore Chinese politics they do so at their peril. U.S. policy makers won’t be effective until they understand the unique fears and motivations of China.
Below is a picture I took today in Tiananmen Square.It is a striking portrait of Chairman Mao on the entrance to the Forbidden City.
While I worked hard this week, the highlight of Hong Kong was clearly the JB Group 2009 Tennis Classic. I was invited to JB Group’s special events all week and sat in JB Group’s box for the tennis tournament. The tournament was all “Venus Williams” as she dominated the other players.
Not only did I get to watch the tournament, but I had the opportunity to meet all sorts of interesting and important people in the Hong Kong political and economic scene including senior government officials, several counsel generals to Hong Kong, industrialists and financial leaders.
Set forth below are some pictures from the tennis tournament.
8% is the magic number for China and everyone that I met today in Hong Kong knew it. Conventional wisdom is that if the economy grows by 8% in 2009 all will be well for the Peoples Republic of China. The crashing export sector won’t be a problem. Tens of thousands of business failures won’t make a difference. Banks won’t have bad domestic loans to write off. And, unemployment won’t rise. All the economy needs to do is grow 8% and everything will be OK.
Today I met with senior bankers from two money center banks (one Chinese and one Western), two Consul Generals stationed in Hong Kong (both representing Asian nations) and a whole bunch of business people. And, one thing was clear; to the person they are “true believers” in 8% GDP growth. Everyone seems to think that the government has “special ways” to make sure that the growth target will be achieved. Slower growth hadn’t been considered and wasn’t thought to be possible.
The 8% mantra was repeated with an almost ritual cadence despite evidence that 8% is far from certain and it is likely that 2009 growth could be considerably less than the target. And, personal observations that contradicted conventional wisdom didn’t cause anyone to question their belief. I think that the implications of less than 8% growth are too scary to contemplate for most Chinese. Some of the contradictory observations I was told include:
Staggering numbers of business bankruptcies and liquidations have happened and the pace is about to accelerate. On January 26th the year of the Ox is going to begin and China is going to be gored. There is general agreement that tens of thousands of companies will shut down for the Chinese New Year and never reopen. And that is in addition to the tens of thousands of companies that have already closed. Apparently many debts need to be settled before the Chinese New Year and companies that can’t meet their obligations won’t reopen after the holiday. Millions of migrant workers are traveling home to families without money and without a job. Economic damage will expand to rural areas where extended families of these workers depend on cash earned and sent home to survive.
The export sector is crashing. Conventional wisdom is that only 17% of the economy is related to exports and therefore an export crash won’t make a big dent in growth. There are two problems with this theory. First, as export sector activity crashes, the rest of the economy will have to grow at a much faster pace to make up the shortfall. But, other than government spending, the rest of the economy is soft and no one could point to a sector that can take up the slack. Real estate prices are down approximately 20%. Overall manufacturing is shrinking. And, consumer confidence is falling. Second, it is likely that the actual amount of the economy tied to exports is much greater than 17%. The conventional wisdom doesn’t fully take into account the part of the economy that supports and feeds exporters and their workers. And, the ripple effect of tens of thousands of failing businesses is unimaginable and may have a “multiplier” effect because of the spillover to general consumer confidence.
A vulnerable banking sector. Currently, the banks are restricting credit to domestic companies. After all, they were the lender to the tens of thousands of companies that are failing. While the banks are not admitting to increases in non-performing assets, all indications are to the contrary. Since Chinese banks are often secured by real estate, they may be able to delay recognizing loan losses until the ultimate liquidation of their real estate collateral. But real estate values are down and, as a result, loan losses, while taking a while to work through the banking accounting systems, will inevitably be realized. As a result, the banking sector’s ability to finance growth is at risk.
Plunging consumer confidence. The savings rate, while already high, is increasing as families hoard cash to protect themselves against hard times. Most people believe that consumer confidence is dropping and consumer spending is in trouble. Unfortunately, there are few “automatic” stabilizers such as unemployment insurance and government assistance to the poor in China like in the United States. The “safety net” as we know it in the West doesn’t exist and weak consumers have little in terms of government support when they are in trouble.
The Chinese government is working hard to make sure that they hit the 8% growth target. Infrastructure spending is accelerating and interest rates are being cut every few weeks. However, given the softness that is occurring in January, the likelihood after the Chinese New Year’s business failures of a weak February and the issues that are rippling through the banking and consumer sectors, the growth target seem ambitious and probably out of reach (at least if the numbers are calculated in the manner consistent with USGDP). The implications to geopolitical and financial stability are enormous and all bad.
Despite all the depressing news, the today’s highlight was when I went to a reception and met women’s tennis stars that had gathered in Hong Kong for the JB Group 2009 Tennis Classic. JB Group is an important First Capital client and I was invited to meet the stars with the company’s management. That’s me with the big smile in the below picture standing next to Venus Williams. What a blast. Mostly I spoke with Venus at the reception. She was both gracious and graceful. I can’t wait to see her play tennis over the next few days.
I am traveling in Asia until Thursday, January 22nd and while I am there Sunshine Notes is converting to the Sunshine Travel Log Blog! Whenever possible I will write about the trip. Some of the travel log blogs will relate to finance and business; while others will hopefully just be fun.
But, before we start the travel log blog there are a few things everyone should know.
I love international travel. Every day is a new experience of sights, sounds, smells and foods that I simply cannot resist. Business meetings are always interesting and meals are the best. I love to eat the wildest foods and hopefully this trip will include some new culinary delicacies. Every time I go to Asia something good and unexpected comes from the trip and I am sure this visit won’t disappoint.
Today at 5:00 AM I left my house in Florida for Hong Kong via JFK.
I am flying Cathay Pacific Business Class (that is me in the picture getting ready to start working on the airplane after takeoff from New York).
OK, so maybe I could have been a little more serious when the trip started but I had to try the Champagne.
The flight from New York is a little less than 16 hours long. The seat that I have is a “flat” sleeper seat and I am writing this blog entry while on the flight (obviously posted from the hotel in Hong Kong).
While Cathay Pacific is a pretty good airline, I can see the effects of the recession in their service. Last year I flew back from Asia in Cathay’s Business Class and the amenities are of noticeably lower quality than they were a year ago. The food on the flight isn’t as good, the Champagne is cheaper and the “special” airport lounge for Business Class passengers was half closed. Also, some of the upholstery in the cabin is worn and just dirty (the sort of dirty that will never come out). I think Cathay is trying to save money where they think most passengers won’t notice.
While the flight is full, there was considerable and surprising discounting of the ticket so that this year my flight cost about 30% less than in the first half of 2008. I guess lower fares but less good “creature comforts” are both sides of global deflation.
The Cathay Business Class seats are somewhat weirdly designed. Each seat is its own little pod. They go flat but they are very narrow and every passenger is totally isolated from other passengers. Also, because they are slanted (rather than pointed forward) take off has a very unusual sensation that seemed to make some people sick.
Below is a picture of the Business Class Cabin. It looks cool but because everyone is in their pod but it is an isolating 16 hour experience.
By the way, can you make out the three screaming kids in the cabin? I bet you can’t because it was just as I was taking the picture that two of them “chop blocked” my knees from behind (that’s why the picture is crooked). The third hung back and laughed. I thought they were cute and well behaved when we got on the airplane. My mistake was trying to talk to them. Once the cabin door was closed they got some candy from their parents and the fun started. For some reason they thought that I was like a big kid that would like tearing his ACL. If you read in the newspaper about an irate passenger stuffing some small kids into an overhead bin you will know what happened. See what I mean about international travel, it is always interesting. The kids didn’t speak English as a first language so this counts as another exciting international travel experience.
When we land, I will be in another world, the Asian world of Hong Kong.
Hong Kong is a really cool place because it is an economic and social paradox. It is part of the People’s Republic of China but is a special administrative region within China and is nothing like the rest of the country.
Hong Kong began its history as a trading port on the south coast of China’s Pearl River Delta. After China lost the First Opium War in 1842, Hong Kong became a territory of Britain. Because China lost a few more battles and wars, Britain was able to grab a lot of land. In 1898, China formally recognized the reality of British colonialism by executing a 99 year lease for the expanded territory of Hong Kong. The lease was up in 1997 and, not surprisingly, China declined to extend it. The Chinese mentioned something about no longer being interested in having a foreign power occupying their territory.
At midnight on July 1st, 1997, Hong Kong sovereignty was transferred back to China. As part of the transfer of power, China agreed to the Hong Kong “Basic Law” which stipulated that Hong Kong would be governed as a special administrative region of China for 50 years after the handover. Pursuant to the Basic Law, Hong Kong retained its British common law based legal system, its independent judiciary and virtually all of the human rights that existed under British rule. Since 1997, it has retained its “special status” with high levels of autonomy under the paradoxical Chinese “one country, two systems” policy.
There are 6.9 million people living in Hong Kong in some of the most densely packed neighborhoods imaginable. Many of the apartment complexes are enormous and Hong Kong has a unique skyline that is as recognizable as New York or London’s. However, outside of the urbanized districts, there are sections of Hong Kong which are mountainous, totally unpopulated and seem like they are from an altogether different time and place.
Hong Kong is where East meets West in economic, political and social interaction. It is enormously important to global stability and trade because it is the Chinese political and economic Petri dish where everything gets mixed up and mainland leaders learn how to maintain political legitimacy in a country with Western style human rights, free speech, strong property rights and an independent judiciary.
While Hong Kong is free how free is it really?
According to the Heritage Foundation, Hong Kong is the freest economy in the world which the Heritage Foundation thinks it is economically freer than the United States and the United Kingdom. In its 2008 rankings of economic freedom, the Heritage Foundation wrote
Hong Kong scores exceptionally well in almost all areas. Income and corporate tax rates are very competitive, and overall taxation is relatively small as a percentage of GDP. Business regulation is simple, and the labor market is highly flexible. Investment is strongly encouraged, and there are virtually no restrictions on foreign capital. The island is one of the world’s leading financial centers, and regulation of banking and financial services is non-intrusive and transparent. Property rights are protected by an independent and virtually corruption-free judiciary.
…A British colony for more than 150 years until the 1997 transfer of sovereignty to China, Hong Kong retains its rule of law, simple procedures for enterprises, free entry of foreign capital, repatriation of earnings, and financial transparency. It is a major gateway for business with China. Major industries include financial services, shipping, and other services. Manufacturing has largely migrated to mainland China. “
Interestingly, the Heritage Foundation ranks the United States as the 5th freest economy and Great Britain the 10th freest economy. China is ranked the 126th freest economy.
Another interesting paradox regarding Hong Kong can be found in the CIA World Factbook. According to the CIA, Hong Kong has the world’s 13th highest per capita GDP at approximately $42,000 per annum. The United States has a slightly higher per capita GDP of $45,800 per annum. But the United Kingdom ranks far below Hong Kong at 29th highest per capita GDP at approximately $35,000 per annum.
Also, according to widely used Mercer cost of living survey, London is a much more expensive place to live than Hong Kong. Mercer claims that London is the third most expensive city in the world to live, while Hong Kong is about 7% less expensive.
So, compared to the United Kingdom, Hong Kong has more economic freedom, a materially higher per capita GDP and lower living costs than in London. It seems that the “student” learned good lessons from its former teacher.
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