The China Price

Datuk said

...When a ship sailing in a stormy sea with an invisible front side the captain need to apply his common sense that guilded by his previous experiences as well as taking into consideration of the on the spot factors for moving forward to the planned destination.

Thus, the experience (history) and common sense (objectivity of view point) are two helpful gurus for guilding us to sail through the current economy sea.

In my opinion, there were 2 aspects of inter-dependent spending in china, namely consumer spending and infra and capital investments. A strong consumer spending derived from the strong confidence which in turn influence the capital/infra spending and vice versa.

China as we known is a typical export orientated economy. This is to say that the growth factor in CHina for many years has been driven by its "factory of the world" due to it cheapest cost relative to other countries.

However, the comodities boon for the past 3 years had changed this scenario. The external demand has already sunk prior to the olympic games. Apparently, the world is unable to absord and live with this inflation.

lsb said...

Everyone has been wrong on China since Deng opened up including myself. The leaders understood that the strength of a country is in its middle spending class, and China today has over 200m.
China can trade and spend within itself for a period of time while the world stabilized. It has the reserves to do so.
China will continue to confound conventional wisdom.

ash said...

I often wonder. If the world consumption drops, and China is unable to export its products to the US and Europe, then who will buy them? Products made for the US and Europe markets...are they consumable by the Asian and CHinese markets? Factories fitted with the latest technology at high cost and producing high end products, can these expensive products be sold to fellow Asians and Chinese? Will asians and chinese buyers afford them? Will it suit their taste?

Comments: There is the wrong perception as to why China is still barging along head on when the rest of the world is slowing down, in particular US and Europe... the crux is that China is not producing to sell to the world on their own... it is a fact that some 60%-70% of China exports are by these foreign companies producing in China to export back... this is the crux of the globalisation movement.

China's voracious appetite for global commodities is not for their own consumption, but to satisfy the huge amount of FDI that has been flowing in over the past 10-15 years. Of course, the rise of China as a magnet for FDI has also the effect of bringing up a huge new middle class of consumers, and that kind of feeds off each other. This kind of "new demand" is not so easy to erode as the badge of honour is the "China price".

While the FDI is supposed to generate cheaper manufacturing bases, inadvertently these units will also benefit from the much higher demand from the new China middle class. That's a benefit no one wants to shrug off.

The question about higher commodity prices and materials eroding China's advantage is mistaken because to produce elsewhere would incur the same cost structure. What China does well and cheaper is leveraging on their strong economies of scale in almost every manufacturing process. What started as a global factory is also having a huge domestic demand to further squeeze efficiencies and margins. These economies of scale are hard to beat.

The question is then will these foreign companies shift their manufacturing Chinese base elsewhere? Where can they go? The world has to live in the brave new world of "the China price"... if you cannot compete with the same product and services produced by China, you better close shop. Thats what has been happening in a big way for the last 10 years. Thats also partly why big foreign MNCs everywhere has been able to eke out good margins growth by putting a lot of their manufacturing and processes in China. A slowdown in the US is bad, but not to the extent of shutting their China operations as thats their magic 8 ball. Cuts will be made back in high cost areas back in their local offices. Hence the fear of "who to sell to" is not a China problem.

p/s photos: Melissa Ng Mei Han