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China's Most Expensive Export: Price Inflation
As you recall, my take on the deflation vs inflation debate is much
less crystal ball-ish than many other pundits on the web. I never was
very much into fortune telling or forecasting the future. From what I
observed and researched, if I had to make a call that call would be
stagflation.
On that note, here is an interesting note from
one of my site's subscribers on how China is exporting to what is
amounting to stagflation to the United States, now!
Hi
Reggie, I thought it was interesting to get a price increase from China
when we have deflation over here, since you just wrote a China and
stagflation piece I though it maybe of interest to you.
I am in
the furniture business and took more of an interest in investing
through your site. My company imports furniture from various Asian
countries, Costco is our largest customer. Costco had two Furniture
only stores, doing $120mil in business for the both stores, they closed
these stores last year , due furniture not being a growth area for them
going forward (they still sell through their regular stores and .com)At
that same time this was only June last year, Chinese factories were
laying workers off, said workers returned to their homes mostly in the
country. Now we have factories in China raising prices on products
destined for deflationary markets, not by a small amount either, 6-10%!
****
And a few days laters...
Hey Reggie,
Here
comes something on this price increase issue again!, really all this is
happening very fast and at high $/% increase levels.Attached is
a summation of our suppliers announcement (this is sent to Canada
customers though not sure about US, though TPEB is East to West) and it
indicates right off the bat “that the situation is expected to get
worse - increasingly similar to conditions back in 1998 (when there was
a huge surge of bookings combined with capacity cuts on Transpacific
resulting in 3 week backlog and a $1500 increase per 40ft”You will have more economic info at your hands than myself, though this is what I know.
1998
was probably (again you may know more), the begging of mass volume
exporter from China, therefore not enough vessels to ship this quick
jump in volume, China joined WTO in 2001 and exports started to explode.The drop in 08 exports led to a decrease in the container ship fleet and now we have stimulated re-bound.
The
shipping companies have not been pulling ships back into service, they
mostly likely waiting to see what orders are like after Chinese New
Year, hence we have low carrier vessel capacity.The letter
states immediate GRI (general rate increase) stating that TPEB (Trans
Pacific East bound) is below the Europe rate route. These increases
will impact goods that are currently in production or awaiting
shipment, most goods will be already sold or quoted on, increase’s
cannot be passed on immediately.When we had went through GRI’s
up to 2007, we could pass it on easily as increasing business was
easily able to absorb this, then we had a crash in prices with
increases now coming fast within 18 months, the up and down of prices
so quickly is difficult, it is possible we can see these GRI’s removed
by the 2nd qtr as Chinese new year shipments do get bottled neck due to
2-3 week shut down depending on factory, mostly though the stimulus is
creating this demand which the carriers cannot deal with due to many
ships being anchored.
I have not included the
supplier letter since I have yet to get explicit permission from the
reader yet. Below, is what I have had to say in the past on the topic.
On inflation, deflation, and stagflation:
- Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?
- Deflation, Inflation or Stagflation - You Be the Judge!
- Are the Effects of Unemployment About To Shoot Through the Roof?
On China:
- China Macro Update
- Believe Those China Growth Stories at Your Own Risk - Just Ask Google!He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
- Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
- Now that the world is forced to agree with Reggie on China's growth propsects...
- Just another Reggie Macro Rant...
- Anecdotal thoughts for discussion
- How quickly protectionisim erodes the gains of global commerce when thing get rough!
- advertisements -
I wish China would indeed increase the price level of their exports so that factories and jobs can come back to the West.
I don't think that's going to happen, ever.
The GRI's are independent of China's situation even if shipping through COSCO, as they are competing globally against other steamship lines.
China has been having wage-push inflation for the past 2 years due to....wait for it...increasing wages and a minimum wage floor. Anon 1894191 is pretty close to the mark here, Enjoy the food in Banglaore!
Also, the Chinese govt was subsidizing exports (in blatant violation of WTO rules...not sure how that went on for so long) via an "export tax credit" which lowered the cost of everything leaving China approx 8-15%. Those credits have mostly been phased out over the past two years.
All of the Fortune 500 players I know who used to set up small & mid sized production facilities in China are now setting them up in Thailand, Vietnam & India.
So in response to the original post, Is China exporting higher prices..yes, but that landscape will adjust until we hit the next level of lower wages.
However, note! the days of having the Chinese govt whack 10% of the cost of everything leaving it's dock are over!
You are lost and it is sad... We export inflation to China... You are also way late to the ballgame..
http://www.marketskeptics.com/2009/01/hyperinflation-will-begin-in-china...
Exactly!
I'm figuring that China will burn through its reserves and crash through the floor. By this time the US and other western countries will mired in stagflation (Japan has been the wave of the future- people thought that they would pull out of it, but it's one of the final chapters, not a cyclical event like most economists believe [they live in a virtual world]).
Pree-cisely! They have a fixed amount of reserves. We have the Federal Reserve. We can spend ourselves into a smoking crater for longer than the other guy.
Exactly! We did Russia in under the guidance of the Great Communicator, the same shall occur to China. The U.S. credit card, the weapon of Mutual Mass Destruction.
Chanos:
"Jim Chanos sees bubble forming in the Chinese real estate market.
Owning your own home is fast becoming the number one goal — and fear — of the working and middle-classes of China. Compounded by the fact that there are few modern public or private pension plans for retired workers, this “nation of frugal savers” has made the bet of a lifetime (literally) on already over-priced residential real estate — often with accumulated family savings. If it turns out that foreign “hot money” and Party insiders have been the sellers (or more accurately, the “flippers”), while the workers have been the buyers, the potential for social unrest will soar. More importantly, confidence in Beijing’s economic “Miracle” and its mandarins will soon shatter as investors around the world realize that Chinese policymakers learned nothing from the West’s crisis of just a few years ago. Forget Chinese trade, the yuan, shoddy construction and manufacturing, the pollution, commodity demand, labor migration, or even $2.3 trillion in foreign currency reserves. The only Chinese political economy story that “counts” is the “Chinese Residential Real Estate Bubble.”
http://www.newdeal20.org/?p=7522
well, at the rate the Chinese are STEALING (via hacking into computers) the intellectual property of our companies and more importantly, our Government secrets, no doubt the 'workers' will be making silent running submarines instead of furniture very soon.
THE BEST guy we had to stop hacking into government and industry computers, just gave notice ...he quits! With cell banks of 250 to 500 Chinese Government hackers all hitting one target continuously 24 hours a day, there is no way to out maneuver them with the pathetic resources ( and cocky know-it-all beaurocrats) that the US uses to fight the hackers.
Such fools we are, and still don't get it even when it stares us in the face.
One word: mirror.
Scapegoating will get us nowhere. This is all driven by a massive failure to allocate capital (that and the fact that we're no longer able to grow due to insufficient resources). The Chinese didn't do this!
Well, I'm into the fastener business (nuts and bolts) and we just closed down our chinese factories because of all these price increases. These are some factors that made us decide us why:
- Chinese salaries : +10% (our workers where costing us about 750$ a month)
- Anti dumping in Europe
- higher credit costs from suppliers causing them to charge us also more (-6%)
We closed them down, and are opening new onces in India.
China was interesting for us because they where 5% below any other country. If prices would be 11,2% higher, it would even be cheaper to make the stuff in Europe itself!
The growth china is experienceing, is actually killing them. And their internal markets: A JOKE!
We also have some state owned suppliers, and they are selling us goods at 0.01$ for every 1$ of goods! Talk about a discount! The biggest job there is getting transport as cheap as possible, and even with a 25% that's to much.
Those products aren't even stock articles! They produce at these prices.
Also, China is having a increasing electricity problem which is troubling their production facilities. Blackout happen a few times a day now, where is used to be 1 time every day/2days it's now 2 to 3 times with longer blackout time.
What I think is this: the tipping point of production in china vs. production locally is getting very close. If the internal markets in china aren't ready in time, it will colapse and throw china back in time for 20 years. If they would make it, even for us, this would mean a golden era.
Make your pick...
You are correct, growth is killing China.
Just take a look at this:
Amazing Pictures, Pollution in ChinaOctober 14, 2009, the 30th annual awards ceremony of the W. Eugene Smith Memorial Fund took place at the Asia Society in New York City. Lu Guang from People’s Republic of China won the $30,000 W. Eugene Smith Grant in Humanistic Photography for his documentary project “Pollution in China.”
Again, it sounds as if the pressure to reduce prices (in the face of wage and input inflation) will rear its head.
But... "economies of scale" must be taken into consideration. Lower volume will almost alwasy necessitate higher prices. So, here you've got the big pinch happening, common heretofore cheaper goods being driven higher due to falling production: a reversal of economies of scale. And keep in mind that many of the cheaper manufactured stuff is used in the manufacture/production of other, more expensive, stuff (refer to the person above who is closing the fastner factories in China).
As I've been trying to say, a "growth" system will not operate in a non-growth environment. Right now what is happening is that we're trying to force fan the fires; and while this is keeping the fires going, we won't be able to keep up this extra effort forever- eventually we'll have to cease, and when we do the fire will die out: there is no floor to be had when there are not enough resources to maintain our growth.
Make sure you all read Hoisington's latest quarterly commentary, Hard Road Ahead . My thoughts are that inflation from China will not last long, and the real risk longer-term, is another episode of goods deflation.
Just this guy's $0.02, but I totally agree that China is exporting inflation not only to its export partners but its export rivals as well. Countries like Vietnam are forced to adopt China's (our) weak currency strategy just to compete.
Conversely I believe that the if/when on whether we enter a new deflationary period hinges on China. A deflationary bust in China is entirely sufficient, and probably a necessary condition, to get us back to Great Depression 2. China is the marginal consumer of just about anything in a world where cutbacks lead to capacity constraints. If that marginal demand evaporates so does the entire commodity complex and EM markets.
You know what bothers me, is that inflation is going to take off and normally people can afford the increase, just have to buy less. But with everyone out of work or cuts in pay, people won't even be able to afford the basics. Thats why people need to start waking up... I don't know how it will all work out.
Send me an email at reggie at boombustblog dot com. I would like to speak to you.
That was already alluded to in teh email. Note that the author believes that the price increases are transient and that inelasticity from deflationary destinations and internal China issues will cause a pricing "blowback".
At that same time this was only June last year, Chinese factories were laying workers off, said workers returned to their homes mostly in the country. Now we have factories in China raising prices on products destined for deflationary markets, not by a small amount either, 6-10%!
Same junk, higher prices. Hopefully their "company towns" will be their downfall this time.
The less junk from China that reaches US shores, the better.
I hope you like paying $40 for a package of socks, and $200 for a pair of pants, because that is what is going to happen if China stops sending us their "junk" in exchange for our JUNK! (US dollars aka paper with pictures on it).
Identify yourself and stick around so we can see how true your predictions are in 18 months or so.
Otherwise you are a windbag crank.