China Inflation

For decades we have been importing deflation from China. The recent bout of inflation over there might soon mean we will be importing inflation. From Barron's (emphasis mine):

A nifty report by Bank of America/Merrill Lynch's crack Asian economics team describes how Chinese inflation is going global. In particular, prices of manufactured exports are now rising apace with quotes on commodities. In the latest Canton Fair in October-November 2010, the analysts report, export prices were hiked 3%-5% (in dollar terms) from those exacted from foreign buyers at the same fair held in the spring, while labor-intensive goods -- apparel, shoes, luggage -- were boosted an immodest 10%-20%.
The rises reflect, among other things, an increasingly restive labor force, especially migrant workers who got an 18.7% raise in wages in the first three quarters of last year, and the shrinkage of the supply of rural surplus workers younger than 40, which had provided a steady flow of cheap labor. Rising paychecks also have lifted food prices, which account for about 75% of the rise in the country's consumer price index.
As the BofA/Merrill analysts sum it up, "Inflation in China's headline CPI -- as well as manufactured prices -- suggests that we have reached a key inflection point in the China story. The supply of low-wage, surplus labor has probably disappeared. This could be the end of a disinflationary force on the global economy."

6 comments:

Anonymous said...

And we can all thank the bearded genocidal overlord also known as ben bernanke for all of this

Anonymous said...

Way I see it, pez dispenser manufacturing jobs will return to the United states (this is what Obama wants) and the US will now produce more and more goods to export to China as it becomes more and more a net importer of goods. China wages rise as does it's middle class, the purchasing power of it's consumer rises with the yuan and they slowly turn into the Mcdonalds big mac consuming population that the US once was. Looks like we just swapped seats.

revelo said...

The only way to import inflation is for the Chinese to move from trade surplus to trade deficit. Simply raising prices has no effect. American consumers who are forced to pay more for imports from China will simply pay less for something else. In themselves, price hikes are a tax, and taxes are not inflationary.

So is the Chinese leadership moving towards countenancing a trade deficit? Not likely anytime soon. They are mercantilists at heart, just like the Japanese and the other Asians. A trade surplus of manufactured goods sold in a competitive world market forces rapid development, and rapid development is what the Chinese leadership wants. Also, even if the Chinese government took a hand's off approach, the Chinese people would probably generate a trade surplus on their own initiative, because the lack of a safety net and distrust of the corrupt government means the people have a powerful incentive to save as opposed to spend.

Finally, hikes in the dollar prices of labor-intensive manufactured goods simply means that the multinationals will move their production of these labor-intensive goods from China to Vietnam, Bangladesh, Indonesia--the list of countries with cheap labor goes on and on. The resources freed up in China by moving these industries elsewhere can be used for higher-valued added industries, like automobiles, aircraft, computers, biotechnology, etc. So maybe we'll see a little bump in import costs this year and the next, followed by another massive wave of industries and jobs being outsourced from the United States to China. Hardly inflationary.

Tsachy Mishal said...

revelo,

Your theories are quite interesting but the facts are :
commodity prices are higher
wages in China are higher
prices of goods coming from China are higher

Tsachy Mishal said...

Those are facts, not theories.

revelo said...

Facts without a framework for understanding them are useless.

One thing you are correct about is the importance of inflation, especially to someone like me who trades mostly on a long-term basis rather than short and intermediate-term like you. Last week I moved a substantial portion of my money into long-term munis and I'm hoping for an opportunity to move the rest of my money into long bonds--but at a good price. If I'm wrong about long-run inflation (short-term CPI fluctuations are of no importance), I'm going to lose big. Believe me, I am quite willing to accept that I might be wrong. I argue with people over this issue precisely to test whether my theories are correct. When someone with opposing views can only reply: "I have a few short-term facts, you have theories to put those facts into context", that hardly shakes my confidence.