Sunday, February 3, 2008

China's Inflation Hits American Price Tags

We have been talking about this since day 1 in the blog as a "future event" that will be a next shoe to drop - in more recent blog entries we mentioned 'well it's now here' [Another Myth Falling - Exports Will Save the Economy].

More worrisome is another theme I promoted in the fall, the export of inflation out of China. For a long time, the flood of products from China has been keeping a lid on prices. For the first time I have seen, we are now seeing costs rise (0.1%) out of China. 0.1% sounds like nothing but in years past it was a negative number and a large negative number at times. So as costs rise in China, its slowly going to begin to be passed on to the countries they export to. So yet another factor working against the US consumer.

Nice to see that the mainstream press is beginning to recognize it. Meanwhile, the government says there is (all together now) very little inflation.

Expect to begin hearing the terms "cost push inflation" bandied about (haven't heard that since college text books)... so it begins... and again folks, this is not a 2 quarter issue that the Fed can solve with higher rates in 2009. This is the beginning of the "World of Shortages" playing out. And as I keep saying, expect to hear about people fleeing "high cost China" in a few years to places they can find workers for half the rate --- i.e. Vietnam. But again these takes many years to play out. Mexico took nearly a decade to clear out as a mfg base for US... the irony of it all is the more successful you become, the more your people demand better wages, and the less desirable you are in a world where capital looks to exploit labor. If Africa were safer and politically stable trust me we'd have a world full of factories there too.
  • China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months. Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.
  • The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States.
  • Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.
  • In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China’s rise from the lowest rungs of global manufacturing.
  • “China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.”
  • Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing.
  • Even when the market share held by Chinese goods is relatively small, their low prices put pressure on other producers to keep costs down.
  • Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say.
  • But companies that operate in China or buy from here are already reeling from mounting cost pressures that they say will weaken their profits and could disrupt their supply chains.
  • “This is what I call the perfect storm,” said Alan G. Hassenfeld, the chairman of Hasbro, one of the world’s largest toy makers, during a recent visit to China. “We’ve got higher labor costs and labor shortages, plastic prices have gone way up and we’re doing more safety testing.”
  • While no reliable figures exist on average Chinese wages, experts say that factory wages have risen 80 percent or more in many coastal areas in recent years, with the lowest wage about $125 a month.
  • But the actions are also part of Beijing’s desire to move China higher up the global manufacturing chain — away from the least- finished products, like plastic children’s toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles.
  • Whatever the government’s motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with problems that included power shortages, higher raw material costs, rising wages and inflation in other areas.
  • Many Chinese factory owners say a tough new labor law, which went into effect on Jan. 1, complicates the hiring and firing process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages. Some factory owners say there have already been strikes and other turmoil over the interpretation of the new law and how it should be applied.
  • Analysts say Beijing is also stepping up its enforcement of environmental laws, putting added pressure on factories that had long skirted regulations. Adhering to those often ignored rules increases cost, too.
  • All in all, toy producers are among the hardest hit by the changes in law and prices. They rely on large quantities of plastic. They face heightened regulatory scrutiny after the product safety scandals last year. Indeed, some toy factories went bankrupt, squeezed between rising local costs and pressures from foreign customers to deliver a better product at an even lower price.
  • To reduce costs, some factory owners are considering moving to inland China, where wages are lower, or to other parts of Asia, like Vietnam and Indonesia.
  • Li & Fung, one of the biggest companies for supplying products worldwide, says its customers are already responding to Chinese inflation. “There’s a shift in sourcing driven by higher prices in China,” says Bruce Rockowitz, president at Li & Fung. “We’ve already seen a big move in furniture to Indonesia.
  • Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing.
  • “Companies are now ordering for the spring of 2009,” says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. “Factories are coming back and asking for 20, 30, 40, 50 percent price increases.
Remember, every step to modernization requires more costs. Better wages. Better safety of products. Better environmental backdrop. All of it costs money, and makes products more expensive. Until we can build a new series of factories in a new country that could care less about environment or safety or labor wages.

Again as I've stated the past year, I eagerly await the Vietnam ETF. Capital has no feeling; it flees to the cheapest place to produce. It's a flat world and am amazing era we live in.

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