Inflation is estimated to be the single biggest worry of consumers in China. And rightly so, as a consequence, it is the biggest worry of the Chinese leadership. Though largely unreported in Indian media and of course, obviously in mainstream Chinese media, there have been a number of agitations seeking wage hikes. Foxconn and Honda spring immediately to my mind. Wage inflation in China has started becoming a headache for multinationals using China as the base for manufacturing. In my second post, I spoke of excess capacities. It will be of no surprise to know that the excess manufacturing capacity is the strongest in China. So is the excess capital.
Coming to the wage inflation part, as China tries to rebalance its trade portfolio and encourage consumption, it is going to hit the wall of low wages. Though allergic to strikes, evidence available points to a benign neglect of strikes that occur in firms that are financed by foreign capital and a robust response of authorities when the same occurs in Chinese firms. This is an indicator of Chinese leadership forcing foreign capital to spend more of their profits in China rather than expatriating them to their home. That will result in a profit squeeze as I would call it or as a profit drought as called by James Saft of Reuters in his latest column. Either way, the abnormal profits harvested till now by under paying Chinese labour are going to reduce or vanish. James Saft predicts that the profits of US firms are going to go down drastically but I have a slightly different take. Part of the wage hikes will be absorbed by the multinationals but part will be passed on to the end consumer. That, in simple terms, means that consumers will start paying higher prices for imported goods. Economists call this as imported inflation. There is nothing that can be done to negate or cushion this in meaningful terms by policy makers anywhere in the world because, despite the cost escalation, it would be impossible to establish alternate capacities which can produce at the same scale economies. Yes, there is a policy option of raising import barriers by nations and relocation of capacities outside China by manufacturers. But remember, Chinese domestic market will turn attractive as the rebalancing occurs and the companies that may relocate will find Chinese attitude (unsurprisingly) hostile when they (the companies) attempt relocation in a large scale. Now what?
The world will learn to live with higher costs due to lack of alternatives (unless they stop consuming dry cells, toys, watches, computers, washing machines, televisions etc). The lost jobs in manufacturing cannot be reclaimed unless the developed world cajoles its workers to accept wages comparable to China. I do not think it is possible.
The second implication of rebalancing will be the rise in the exchange value of renminbi. This would make imports into China cheaper. It has two implications; first and the most obvious is raw material imports become cheaper and the Chinese consumer will be able to consume more imported goods. The second implication is more intuitive; reduction in raw material costs due to rising renminbi will reduce the cost of manufacture of Chinese goods. So, the effect of wage inflation may be partly offset by reduced costs of imports as both are in local currency terms. This, plus the size of domestic consumer demand that may come, will prevent shifting out of manufacturing capacity of China. Cheaper yuan, jobs remain in China, stronger yuan, jobs still remain in China. The developed world neither has the capital nor the energy to wage a price war with China. They and China will compete for the same markets in Asia and Africa. I would not offer any bets on who is likely to be the winner.
All this matters to Indian Economy. We are not as insulated from global happenings as we think. As I develop the narrative, the implications for India may become more clear.
No comments:
Post a Comment