Friday, September 12, 2008

China will continue to be the center of gobal economic issues

A quick read of today's headlines show that China will continue to be the center of global economic issues. This importance is not diminishing even past the end of the Olympics.

First, industrial production grew at the slowest pace in six years. While still at a double digit pace, the slowdown is a result of the global slowdown in countries which are heavy importers from China. Some of this slowdown was a result of the Olympics, but the strong link between growth in China and the rest of the world is real. China and the rest of the world now has to determine what to do about it. A slowdown in the appreciation of the yuan is one alternative which is being seen in the markets. Costs are going up in China even with the slowdown so how this new growth path is manged will be key to what may happen in the rest of the world.

Second, there was a story about the China's State Administration of Foreign Exchange (SAFE) being used for political purposes. The The FT reports that SAFE used its financial muscle in buying Costa Rican bonds to advance its policy to Taiwan. This has always been the fear with SWF's. They may be used for purposes other than profit maximization. Should we be surprised by this story? Not in the least, but it once again brings up the issue of what is the meaning of free and open capital markets when countries can use reserves for state motives.

Third, the NYT reports that there has been a greater push to unionize workers inside China. While union representation makes sense to allow for better collective bargaining by workers with large firms, there is only one union in China. The unions are targeting Western companies which will lead to a higher cost structure for goods produced in China. The result will be higher prices for consumer goods manufactured in China around the globe. This will have the impact of finally translating some of the higher prices in commodities through the wage structure. Of course, there is also the side issues that manufacturing will seek other other areas to again cut there cost. This will cause capital movement toward the rest Asia and place countries in conflict to gain an advantage for attracting manufacturers.

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