CHINA WATCH

Bonanza’s End

Mon. Apr. 21, 2008


To most Americans, China means cheap imports. Over the past 20 years, the country’s low wages and undervalued currency have enabled Chinese manufacturers to underprice almost all their competitors in U.S. markets. Wal-Mart and other big box stores loaded up with cheap Chinese goods. For American consumers, it’s been a bonanza.

That might be starting to change. Soaring global oil prices and shortages of food and other key commodities are stoking domestic inflation in China, prompting manufacturers there to boost the prices of the goods they send here, and forcing American retailers to raise their prices in response.

Chinese statistics published last week showed China’s consumer price index for March up 8.3 percent over the previous 12 months — its fastest pace in more than 10 years, and well above the Chinese government’s inflation target of 4.8 percent. And analysts say that’s unlikely to ease much anytime soon.

“The days of 1 to 2 percent inflation in China are gone,” says Donald Straszheim, former chief economist for Merrill Lynch & Co., who now is a China-watcher at Roth Capital Partners in Newport Beach, Calif. Global commodity prices are exacerbating costs in China, he says, “posing the potential for much worse news.”

The impact already is showing up in U.S. inflation statistics. A special Labor Department index that tracks prices of Chinese imports here has risen a full 4 percent over the past 11 months, reversing what had been a steady decline for years. Relevant wholesale prices of consumer finished goods in the United States have begun to accelerate.

That doesn’t mean that Chinese-made goods will be expensive anytime soon. For one thing, Chinese manufacturers aren’t yet passing along the full amount of their increased costs. And though Chinese goods might seem ubiquitous to some consumers, imports from China account for only about 7.5 percent of U.S. spending on consumer goods.

But the rise might become visible more quickly in categories where Chinese-made products dominate the U.S. market. Statistics show that China makes as much as 85 percent of the shoes sold in the U.S., 80 percent of the toys and about 40 percent of the clothing. Prices of goods made in India, Vietnam and other Asian countries also are rising.

The soaring inflation isn’t good for China, either. The sharp increase in consumer prices there has prompted mounting dissatisfaction, particularly in rural areas, where consumers have begun staging protests. Chinese Premier Wen Jiabao has called taming inflation the government’s no. 1 economic priority.

The Beijing government has taken several steps to ease inflation pressures. Over the past year, China’s central bank has raised interest rates, restricted bank lending and corporate investment and imposed complex price controls. Most important, despite months of refusing to consider such action, it has allowed the value of the yuan to rise.

The yuan now stands at 6.9 to the dollar, up a stunning 18.3 percent from its level of July 2005, when China began allowing its currency to appreciate, says Nicholas Lardy, China specialist at the Peterson Institute for International Economics in Washington. When the currency shift is weighted to reflect China’s global trade patterns, the rise is 9 percent.

That, in turn, has had an impact on the once-burgeoning Chinese trade surplus. With the yuan’s value rising, and Chinese goods becoming less competitive, China’s overall trade surplus fell 10 percent during the first three months of this year from the first quarter of 2007 — the first time in three years that it has shrunk.

But hopes that inflation pressures in China would begin to wane have been disappointed. The price surge — which initially had been limited to pork and rice prices — has broadened. Soaring prices for oil, food and other commodities — partly the result of China’s demand in global markets — have spread inflation throughout the economy.

Moreover, China’s white-hot economy is continuing to grow rapidly, intensifying the inflation fires. Along with the new inflation figures, the government reported last week that the economy expanded by 10.6 percent during the first three months of 2008 from a year earlier — down from 11.9 percent for all of 2007, but still uncomfortably fast.

What’s more, wages in China seem likely to accelerate, both in response to the continuing inflation surge and because industry is beginning to push into more rural sections of the country, which will probably set wage levels there rising. China’s new, tougher labor laws are expected to embolden workers to seek higher pay.

It isn’t clear yet where big U.S. importers will turn to buy low-cost goods once the prices of Chinese goods rise too far to remain a bargain. Vietnam doesn’t yet have the infrastructure or capacity to meet U.S. demand. And other likely candidates have similar problems. None of them offers what China does in size, sophistication and stability.

All that suggests that while Americans will be seeing “Made in China” labels in their stores for the foreseeable future, the price tags they carry won’t be quite as satisfying as they’ve been over the past 15 years. Chinese-made goods might still be a bargain for American shoppers. They just won’t be a bonanza.

by Art Pine

Mon. Apr. 21, 2008

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