Post by jeffolie on May 20, 2008 15:43:42 GMT -6
What's driven that growth? It's pretty simple. Price. U.S., European and Japanese automakers and their suppliers could easily lower their costs by buying some of the parts they used to make at home from Chinese companies at prices 25% to 50% less. For automakers looking to cut costs to survive, that was a huge incentive. In 2006, for example, when Ford Motor (F, news, msgs) needed to find $5 billion in cost savings, an increase in the number of parts purchased from China was a key part of the plan. Ford announced it would use $2.5 billion to $3 billion in parts from China in 2006, up from $1.6 billion to $1.7 billion in 2005.
That rush to outsourcing isn't over. For example, Magna International (MGA, news, msgs), a huge Canadian auto-parts supplier that was General Motors' (GM, news, msgs) supplier of the year in 2007, plans to boost outsourcing to China by 65% in 2008. But costs are now rising in China. At China's Shougang Group, for example, the cost of producing auto parts climbed by 59% in 2007.
Two basic and related trends in the Chinese economy are behind all those pressures. First, the decision of the Beijing government to hold down appreciation in the yuan in order to protect Chinese exports has resulted in a runaway expansion of the money supply. Yes, the yuan has climbed in value against the U.S. dollar by about 20% in three years, but the currency is still extremely undervalued.
To limit the rise in the yuan, which makes Chinese products more expensive to overseas customers, the Chinese central bank has had to buy dollars, but that has had the effect of putting more yuan into circulation. In April, China's money supply grew 16.3%. That's an improvement from April's 17.5% annualized growth but still more than enough to stoke inflation. Inflation in consumer prices hit an annualized 8.5% in April. That's the third straight month with inflation above 8%.
Second, inflation now has its own momentum in China. Workers -- in short supply in many of China's most industrialized areas -- are demanding that wages keep up with inflation and then some. The minimum wage in Shanghai, for example, which went up by 12% in September 2007, climbed an additional 14% in April.
But in May the manufacturers hit the wall. Labor costs in China are up 25%, the manufacturers say, and consumers are just going to have to pay part of that in higher prices for laptop computers. And the rising prices of Chinese imports won't help struggling U.S. consumers either. Chinese imports account for just 8% of consumer spending in the U.S., but those imports are disproportionately represented in categories such as toys (80%), shoes (85%) and clothing (40%). The toy industry, for example, projects 5% to 10% price increases by Christmas.
And any price increase on Chinese imports will also hit disproportionately hard at big-box stores such as Wal-Mart. About 70% of the products that Wal-Mart sells come from China.
articles.moneycentral.msn.com/Investing/JubaksJournal/ChinasNewestExportInflation.aspx
Wal-Mart may be a good short sale
That rush to outsourcing isn't over. For example, Magna International (MGA, news, msgs), a huge Canadian auto-parts supplier that was General Motors' (GM, news, msgs) supplier of the year in 2007, plans to boost outsourcing to China by 65% in 2008. But costs are now rising in China. At China's Shougang Group, for example, the cost of producing auto parts climbed by 59% in 2007.
Two basic and related trends in the Chinese economy are behind all those pressures. First, the decision of the Beijing government to hold down appreciation in the yuan in order to protect Chinese exports has resulted in a runaway expansion of the money supply. Yes, the yuan has climbed in value against the U.S. dollar by about 20% in three years, but the currency is still extremely undervalued.
To limit the rise in the yuan, which makes Chinese products more expensive to overseas customers, the Chinese central bank has had to buy dollars, but that has had the effect of putting more yuan into circulation. In April, China's money supply grew 16.3%. That's an improvement from April's 17.5% annualized growth but still more than enough to stoke inflation. Inflation in consumer prices hit an annualized 8.5% in April. That's the third straight month with inflation above 8%.
Second, inflation now has its own momentum in China. Workers -- in short supply in many of China's most industrialized areas -- are demanding that wages keep up with inflation and then some. The minimum wage in Shanghai, for example, which went up by 12% in September 2007, climbed an additional 14% in April.
But in May the manufacturers hit the wall. Labor costs in China are up 25%, the manufacturers say, and consumers are just going to have to pay part of that in higher prices for laptop computers. And the rising prices of Chinese imports won't help struggling U.S. consumers either. Chinese imports account for just 8% of consumer spending in the U.S., but those imports are disproportionately represented in categories such as toys (80%), shoes (85%) and clothing (40%). The toy industry, for example, projects 5% to 10% price increases by Christmas.
And any price increase on Chinese imports will also hit disproportionately hard at big-box stores such as Wal-Mart. About 70% of the products that Wal-Mart sells come from China.
articles.moneycentral.msn.com/Investing/JubaksJournal/ChinasNewestExportInflation.aspx
Wal-Mart may be a good short sale