Costs in China increase
Costs are rising as much as 20% along the coastal cities of China where most of the manufacturing is located. The purchasing price index (PPI) has increased 7% recently.
China will be raising interest rates, and the RMB is already quoted at lower that 7.1 to the U.S. dollar (4 years ago it was 8.1). The consumer price index (CPI) is up much higher due to food costs but when the PPI catches up, other prices will rise, causing more inflation for the consumer. The M1 rate is again increasing, partially due to the money coming out of the stock markets, but also due to people watching the rise in prices, and not wanting to do any discretionary spending. That then cuts the domestic spending part of the GDP.
The trade deficit with the US has gone down, while the deficit with the European Union is higher, some quoting as much as 42%. This is bound to cause some protectionist measures from that area in the spring.
Heading west in China is now a popular way hold on to those labor costs. It can be as much as 30% cheaper there. Logistics costs of course are increased, but not to the extent to override significant savings. Weather can cause problems also, but that is a problem in many places in the world.
Some companies may be thinking of alternative manufacturing locations to China. Vietnam is a potential alternative, but ports in the country need to be improved.
There is not a lot of high-tech manufacturing, but the clothing/giftware industry is progressing nicely. Steel and other raw materials processing is in an infancy stage.
Thailand, the Philippines, Indonesia and Cambodia may be alternatives, as well. Malaysia, which has a good transportation network and a well-established manufacturing foundation.
Walter commented:
I recently read that China is now importing 25% more oil, and uses
an unbelivable amount of the worlds steel ( though if you are here
as see the building and car production it is not surprising) which,
looking at the increase in Iron costs from Brazil and
Austrialia...well lots of prices are going up... As I said the PPI
increase will be felt later as a leading indicator. Food is high,
but other things are going up and for those Expats working here in
US dollar salaries..well there was a big pay cut in the last 3
years. The interesting time will be after the GAMES, and see what
happens in this economy, and what government controls are used..
Loggie commented:
To my understanding, not only Chinese manufaturers are facing the
cost increasing problems. The biggest issue would be the raw
material inflation from the international market. Chinese market is
not as mature as Westen markets, like Amerian or European one. In
those market, there are manay commerial arrangements to migrate the
affects from inflation. However, most manufacturers in China could
only accept the price increase then transfer to their customers. It
still take times to develop Chinese market conditions.
Lei commented:
Interesting article. I don't think those alternative countries will
ever have the capacity China has. For example, Vietnam's industrial
output is less than the city of Shenzhen in southern China. There
are simply not enough labors in those countries that can compare to
what China has. There are much debate on the causes of China's
current inflation. Since so far the inflation is limited to food,
some believe the price hike is caused by a supply and demand shock
in food industries. Those people believe, the market will run its
course and bring the price down later in the year. Others believe
the inflation is caused by China's monetary policy which is going
to be a more serious issue.
