Chinese Inflation: Wages up 10-15%

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Costs squeeze Chinese factories
By ELAINE KURTENBACH Associated Press
2/22/2008

Manufacturers migrate to nations with cheaper labor.

SHANGHAI, China -- The teddy bears selling for $1.40 in Shanghai's IKEA store may be just about the cheapest in town, but they're not made in China -- they're stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: Its huge economy, which has long offered some of the world's lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labor.
Those expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.
Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.
"Americans continue to want to buy at lower prices," said Kevin Burke, president
and CEO of the American Apparel and Footwear Association. "They are used to going to the store during Christmas and getting something cheaper than a year ago."
That's no longer a sure thing.

For instance, American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 to 10 percent for the 2008 holiday season, largely because of rising manufacturing costs.

Costs in China are climbing nationwide, but the greatest pain is being felt in the south, where about 14,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbors Hong Kong.
To adapt, many multinational manufacturers -- including Intel Corp., iPod-maker Hon Hai Technology Group and Japanese companies like Canon Inc. and Sony Corp. are expanding operations in Vietnam.
Auto parts makers are decamping for the Middle East and Eastern Europe, textile-makers to Bangladesh and India.
Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China's traditional export hub of Guangdong are closing or moving out.

Meanwhile, Chinese inflation has risen to its highest point in more than 11 years, jumping 7.1 percent in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but analysts say longer-term pressures on prices for manufactured goods will persist.
"China needs to reprice its exports, and that has to be accepted by international buyers," says Andy Xie, an independent economist based in Shanghai.
But raising prices may be tough.

Despite its huge pool of unskilled rural laborers, China's supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 percent to 15 percent a year.
A new labor law requiring stronger employment contracts is expected to raise costs even more.
Prices for plastics and other materials have climbed 30 percent or more, and electricity rates are surging, too. The government has also slashed export tax rebates -- originally given to promote exports -- on more than 2,800 products accounting for nearly 40 percent of all Chinese exports.

The era of cheap labor is gone forever. The Chinese government raised salaries for government employees by about 40% last year. They do this every five years. Inflation has to rise to match the higher buying power. They will have to raise prices on exports. Going to other countries is not a long term solution since Chinese population is so large that if its cheap labor is saturated, then other cheap labor countries will be saturated very quickly. So factories aleady built in China will stay there. Real estate market is getting much worse this spring. In my neighborhood, the first forclosure home was sold two weeks ago. Just saw a new one today. Quite a few forclosures and short sales in Great Falls too which is one of the most expensive area in DC metro.

The era of cheap labor is gone forever. The Chinese government raised salaries for government employees by about 40% last year. They do this every five years. Inflation has to rise to match the higher buying power.

That's some dangerous thinking. Inflation does NOT have to rise to match higher buying power. Productivity can rise instead. I posit that some one degree or another, it is.

They will have to raise prices on exports. Going to other countries is not a long term solution since Chinese population is so large that if its cheap labor is saturated, then other cheap labor countries will be saturated very quickly. So factories aleady built in China will stay there.

They don't have to do anything. They can buy more capital to improve efficiency. Of course, sometimes the capital is underutilized off shore and thus cheaper.

Real estate market is getting much worse this spring. In my neighborhood, the first forclosure home was sold two weeks ago. Just saw a new one today. Quite a few forclosures and short sales in Great Falls too which is one of the most expensive area in DC metro.

Things appear to be firming a bit out here and homes are beginning to move. Each market is it's own.

I'm pretty confident that the huge jump in forclosures was largely due to investors getting over extended. Going foreward, we see. I think that real estate sales will be surprisingly good, but inflation will be surprisingly bad this year.

The big surprise, gold will get killed.

That's my prediction. Let's see how it plays out.


Mark

I think oil is the most important commodity and perhaps the most important asset to track. Gold will move relative to what oil does. Until CL is no longer the globes primary energy source that's the way it will be. Gold isn't going to make any major down move (ie/Fib 38 or 50 % retrace) until oil goes through a major correction IMHO. Petroleum inventories in the US are rising to near record high levels (CL and HU) but yet price is rising also. We saw similart activing over a year ago. The problem is global inventories of CL and HU are actually quite low verse US inventories and that's what this is all about. Supply hasn't budged for over 2 years despite record drilling and a multiyear bull in CL. We're reading about double digit (and in some cases triple digit) % increases in YOY petro demand in China. China isn't the only place where CL demand is exploding. It's a global story not a US one and that's why so many US managers are not on board. They simply think this cycle is the same as every other energy/commodity cycle of the past 50 years. That may be true WRT to the secular bull commodity move but we must find alternatives for CL. Anytime oil stocks undergo a nice dip on the weekly chart around the 50wk EMA you should be a buyer. I have built large positions in PWE, BTE, ERF and PEY/un.to based on fundamental analysis with a little TA thrown in their for my entry. I strongly suspect these CANROYs have put in LT bottoms as their relative strength versus other energy stocks is quite impressive over the past couple of months. I'm now branching out into small and mid cap players with huge assets in the ground or undervalued emerging producers. Ratio charts I use for the XAU, OSX and XOI versus their commodities are now on or nearing IT buy signals that have worked from even before the commodity bull started. As far as gold, all four of Hussmen's backtested "Going for the Gold" parameters are now saying buy gold stocks for a 1 plus year holding period. The fact that I'm too "scared" to get fully on board tells me it may be time to put more than a foot into the swimming pool. The problem is the overall market is acting so poorly right now and it's keeping everything in check.