In the coming era of a rising Asia, we in the West need to teach ourselves that facts on the ground far away are going to affect us deeply. This will be a hard lesson for many whose habits of thought are molded to the American imperium of the last 70 years.
Andy Xie has an important post about China’s labour market.
His thesis is that China’s economic transition has reached the point where wage inflation is desirable, indeed inevitable, and his recommendation is that policy lead this trend, not follow it.
And while he acknowledges that restraining Chinese inflation is going to be necessary to avoid a hard landing, he seems to be asserting that this can be done even while allowing wage inflation to rise significantly. Maybe.
But what caught my eye was this:
Export manufacturers based in China have long been terrified of big buyers from the West. China has a lot more factories than the West has buyers for its products, so exporters have generally assumed that their powerful clients would never accept higher prices.
But business costs have been rising in China, manufacturers are well-connected to markets and infrastructure, and buyers are realizing that their supply options are not unlimited. As a result, western buyers these days should be a lot more terrified than their Chinese suppliers.
It’s quite plausible that China’s superior infrastructure will make a migration of manufacturing to India, Vietnam, Bangladesh less attractive than is being suggested by some, and therefore the West’s “China price” will rise. But for foreign capital manufacturing in China this will mean either raising their prices to their customers or accepting lower profits.
Given the deflationary winds blowing in Europe and the US and the lack of final demand, price rises are not realistic. After all, if Joe six pack hunkers down to spend only on food, transportation and necessary services, how’s a price rise on iPhones gonna work?
(I note that Apple’s stock took a hit when the yuan de-pegging was announced…)
So I suspect that profits will decline instead. Besides the fact that this reinforces my view that the S&P is overpriced, it also reflects a long held view of a particular school of marxism on falling rates of profit.
While I’m skeptical that there will be a return to marxist economics anytime soon, this article does a nice job of reviewing recent history with those interpretative glosses on. And it ends with a conceit I also formulated a year or so ago — though my version was more extremely fantastic: It would be a real irony of history if a revolutionary american government repudiated its foreign debt while Chinese capitalism fumed and threatened intervention.. not sure what that says about me.