But such a generalism would hide the detail that manufacturing within China had become increasingly competitive as the manufacturers sought ever cheaper prices by pushing back into the hinterland. That, however, can only go on for a certain period of time until you run into a manufacturing blockage such as the Himalayas or Gobi desert – or even of course someone else’s border! Even that has not necessarily been a problem in certain circumstances, as Chinese manufacturers have shown themselves willing to outsource manufacturing even to their somewhat caustic neighbour Vietnam.
The effect has been therefore to enable China to continue for many years with the term “china price” becoming a euphemism for the cheapest price in the world. I have mentioned this before but now there are clear statistics that the “china price” is rising and that China’s greatest export has changed from deflation to one of inflation. Their current inflation target is 3% - their current estimated rate of inflation is now 6.1%.
I can understand the reaction to such a statistic being “so what?” The answer lies in both the domestic issues within China and the exporting of that inflation elsewhere.
Firstly, the domestic issues. We have in the UK an amazing ability to accept at face value certain “givens” in China. For example, China technically has no long term unemployment – yet we know that this is not the case. China has little sign of civil unrest – yet we know that there have been thousands of riots of some scale each year. One of the “benefits” of being a centrally controlled oligarchy is that authoritarian control is relatively straightforward and if you wish to remove hundreds of thousands of people out of the way of your new dam (say the Three Gorges Project) – then you can and you don’t give a damn (or more concerningly, nor do we it would appear).
Only last week came reports of 31 people having died or been injured in food riots in the western city of Chongqing. Apparently the attraction of cut price cooking oil became a lethal attraction for popular demand. This is a symptom of a greater problem within the country – that of inflation. Previously I have highlighted issues around food costs generally rising by some 15% in a year, but now the pressure is spreading out into other areas. Inflation figures for manufacturing have risen by 3.2% in the last month alone and no doubt will be pushed higher as controlled (subsidised) fuel prices are raised. Certain steel related products have seen even higher rises of close to 10%.
These rises will feed through to export prices and as the Yuan continues its allowed and controlled, slow and steady appreciation, this will inevitably put further pressure on Chinese manufacturers to raise prices. Why will the Yuan rise? The answer lies not with the bleating of election fevered US populist politicians, but rather with the saner arguments from US Treasury Secretary Paulson and appreciation by the Chinese authorities themselves that to control inflation other measures might be needed.
Bank rates have been rising and the Bank reserve requirements also been raised, but so far to little effect. It seems as though there may be an increasing probability that the Chinese might be moving towards a significant one-off revaluation. This could have the double benefit of addressing some of the imbalances (especially for the US and their currency) but also to address some of those domestic monetary issues as well.
Secondly, the external issues. For us in the UK there is also a further knock on effect from these events in China. Last week’s Inflation report from the Bank of England highlighted the rise in our inflation to slightly above the Bank of England’s target of 2% on the CPI and the broader (and frankly more logical given its constituents including mortgage payments) RPI rising to 4.2%.
With a higher proportion of our imported manufacturing goods coming from China it is only a matter of time before these price rises will be feeding through to us in the forthcoming months.
Add to that a strengthening Chinese currency and every likelihood of a weakening Sterling, and then this will put further pressure on our inflation outlook and create the dichotomy for the Bank of England as to whether to cut rates to aid the weakening economy or maintain the steadfast thin red line against the perils of “Johnny foreigners” inflation. Over to you Mervyn, Alistair and Gordon.
***
And finally… a moment for legal consideration. I have many friends who are lawyers and of course have much sympathy for the desperate events unfolding in Pakistan, however the statement in the news of “baton charges by police against lawyers” did cause a slight wry smile to briefly cross my face when considering how many of us suffer under the burden of cost of these jurisprudence professionals.
Other legal news comes from Virginia, where a judge has been removed from the bench for deciding a custody case on the toss of a coin. We can only guess his new nickname.
And also from the less well reported Bedouin tribal court which judged that having made a suggestive remark to a shepherdess, a man could have a choice of punishment of either giving her 25 camels or cutting his tongue out. Coin tossing suddenly sounds a whole lot better.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management