Everything’s Higher With China
China moved our markets last week, with bigger effects on the way. Chinese wages are moving significantly higher. Americans will see higher costs and, perhaps, more employment opportunities.
Our markets ran up three per cent in a single day on Thursday, June 10. Strong news from China sent hedge funds scrambling, as the Chinese Communists once again schooled Americans on how capitalism works.
According to reports, Chinese exports are up a huge 48.5% year over year. Imports are up. And inflation is contained.
That’s sort of an amazing picture, and on the face of it, very good news.
U.S. performance has been lame, not because of our companies but because of the relationship between our companies and our government. Add the sovereign debt crisis in Europe, and we rely more and more heavily on China to help pull us out of our slump.
China, as you recall, has been trying to slow its economy for the last three months, hoping to avoid a real estate bubble, its own sub-prime credit crisis, and inflation.
While this strategy seems imminently logical, it hasn’t been attractive to the utterly dependent U.S. economy. To quote the popular image: China will tap on the brakes, and we could go through the windshield.
By last week, only the strongest, boldest traders were left in our markets. Wild price swings (high volatility) warned everybody to get out of the way. Anything could happen. (And it did.) Retail investors have been chewed up or have simply left the markets. Mutual funds don’t have any new money to invest. And many hedge funds have gone to cash.
The only players left last week were either clueless or cold blooded. The most cold blooded of all being computerized traders executing some 20,000 discrete trades in a single second.
So, in comes China with all its good news, and the markets gyrate violently to accommodate it.
Please understand, I’m no China scholar. (And I do think I need to do something about that.) But starting from where I am, and considering the impact China can have on our economy, I’ve got to ask a few very important questions:
First, if China’s number one and number two trading partners – Europe and the U.S. – haven’t been all that busy lately, then who in the world, literally, is buying all this stuff China is exporting? I just don’t see a big enough source.
I can understand that year over year figures can seem enormous. Last year was unbelievably bad. It doesn’t take much to show fantastic percentage increases over that disaster. But still, if Europe and the U.S. are declining, what is it that’s making the Chinese numbers come in so strong?
I can only imagine three possibilities, one being total fiction. Another would be delayed reporting which might tell an entirely different story one month from now. And, of course, we have the possibility that there really is a great deal of business being done without our participation. (I’m not ready for that conclusion, just yet.)
All of that comes down to: We don’t know. And next month may reveal a lot. (Possibly to the detriment of our stock markets.)
MY BEST GUESS ON CHINA
What’s my best guess? If the U.S. has been slow, and if Europe will get slow, then China has to slow at least a little. However, this is an economy getting ready to pass Japan as the third largest, and it is growing very rapidly. When I translate “slow” into Chinese, I get “grow less fast.” Considering that slowing its economy was one of the government’s goals, China may actually remain in good shape.
Then we have the inflation, real estate, and credit concerns. If I understand correctly, the Chinese government is trying to avoid a bubble of speculation that is developing from a fast growing economy. The command economy of that nation is able to create some astonishing effects pretty quickly. When that government says “stop lending” or “stop buying,” that’s pretty much what happens immediately. Creepy, but effective.
HUGE INCREASE IN LABOR COSTS
Here’s what the government can’t control: People are jumping to their deaths off their employers’ buildings, rather than continuing to work for minimal wages. I first mentioned the Foxconn story over the weekend.
I wrote about the impact of Chinese wages on U.S. wages, saying that this is so big and so powerful that any U.S. company low-balling incoming candidates may lose the candidate and, over time, some existing employees, as they follow the path to higher pay. (Here in the U.S., IT people are currently refusing to show up for positions they have previously accepted.)
At the time I wrote that article, Foxconn had reportedly responded to its upset by creating an immediate pay raise of up to 65% for its 300,000 workers. This will directly affect the cost of products made for Apple, Dell, Nokia, HP, and others.
Stories, as you can imagine, are changing rapidly. In more recent updates, Foxconn says it will double the pay of its lowest-paid workers.
What is consistent is the intensity and the speed with which this movement is spreading. Perhaps emboldened by the Foxconn events, workers at Honda Motor Co. in southern China went on strike, once again challenging pay and conditions at their workplace.
No sooner was their strike reported settled than related suppliers were struck. Employees at Honda Lock demanded a 72% increase, according to stories. Even after the strike was reported settled, more recent reports indicate 90% of those employees have arrived at work but refuse to do any work.
This is big.
Is it inflation for workers to actually get a 72% pay increase, bringing themselves to a personal income of $234 per month? That’s not my definition of inflation.
At the heart of it, inflation involves debasing the currency. China has essentially done the opposite.
Sweeping across this huge country is an insistence that employees are worth significantly more than they are earning today. They are making these demands, knowing that they are challenging government authority, and they are risking losing their jobs to others who would be pleased to step in. They don’t care.
POTENTIAL EFFECTS IN CHINA
Obviously, these workers know that the risk of losing their jobs is declining. There is a shrinking pool of low-cost labor available. Demand is finally beginning to exceed supply.
Next up, we can expect consumption to increase, prices to go up, imports to increase, and Chinas trade surplus will slow.
Rising costs in China may shift more jobs back to the U.S. At the same time, U.S. labor costs will certainly rise, as our own tax increases and health care costs kick in.
It is almost entirely in the hands of politicians whether we go roaring back to work. We do have the potential to thrive.