Saturday, December 08, 2007

Time Are A’Changin’

There have been a lot of changes in the recent macroeconomic environment in China. Banks have raised minimum deposits required to purchase property, across the board. Official inflation numbers could be worse, but interviews with a broad array of China-based manufacturers tell a different story. Raw materials, energy, and labor prices have skyrocketed. VAT tax rebates are down, also across the board. Our ex-works pricing on printed products, steel/iron, and plastics have increased from 15% to 45% over the past 18 months.
We have seen indications that buyers are starting to move business away from China – particularly high-tariff products (e.g. finished textiles) to countries such as Vietnam and Honduras with low-tariff development incentives.

There is little doubt that China’s economy will continue to grow. But there is also little doubt that the growth has slowed, and will never regain its previous momentum. China’s economy has grown to a point where it costs at least as much to manufacture there as in less-developed nations. It’s phenomenal manufacturing infrastructure and business-friendly political and legal environments have to date made up for the increasing costs. But on the other hand the level of environmental pollution caused by the last decade’s industrial growth is staggering, the RMB has been slowly gaining against the dollar, and there is tremendous domestic inflation. These factors are unquestionably causing backlash.

Foreign banks have been absorbing domestic bad debt in China for the privilege of early access to markets, and this has mitigated some of the credit problems. Skyrocketing oil prices have helped China Petroleum, but hurt both in the form of pollution from increased usage of low-grade coal, and greatly increasing transportation and electricity costs.

The Cliff’s notes? Things have changed. If you are a buyer, watch the prices you are getting and start to comparison shop. If you are an investor, think about shifting into services that China’s New Economy will need – drinking water, medical, roads and infrastructure, and environmental cleanup.

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