Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, October 03, 2003

The Friends We Used to Have

While I was over at China Media, I also came across this piece whose sentiments I thoroughly endorse. As he says, China's currency future passes through institutional reform:

In the lobby of the Beijing Hotel, there was always a wonderful portrait of Chairman Mao surrounded by a diverse set of smiling people. Entitled: "We have friends all over the world," it is a legacy of the days when China was the political inspiration for the developing world. Today, there are few places around the world where China is not considered a direct economic threat.

The Managing Director of a well-known European firm says he will spend "the remainder of [his] career closing factories in Europe, and opening new ones in China." The North American customers of a well-respected European engineering firm now require them to manufacture 30% of their output in China, and to benchmark the remainder against Chinese prices. Mexico is reported losing jobs to China, and in the U.S. entire industries are at risk of vanishing, leaving only the unemployable behind. The stark reality of China's becoming "the factory of the world" is that factories elsewhere are closing.

This is a big issue! Unemployment is a tragedy wherever it occurs. In the past few weeks, nearly every manager I have met with has had China on their minds - and it's not good. There are no easy answers here, but as this debate grows, it is key to remember several key points:

Revaluation will not be the solution: Despite political pressure for yuan revaluation, this will not happen, or matter, in the short-run. China will not put its own growth at risk; it is as afraid of unemployment as we are. Furthermore, the magnitude of China's manufacturing cost advantages in many industries are well-beyond what any realistic revaluation could correct.

Floating the yuan is even more unlikely as long as China fears significant capital flight once currency constraints are relaxed. Correcting this is about institutional infrastructure.

Chinese factories are now key players in the global supply chains of "our" multinationals: Their success becomes "our" success. "Our" corporations are the beneficiaries of China's cost-advantages, and so are Western consumers! It is not so much that China is taking our jobs away, as it is that "we" are making different sourcing choices in the value-chains that serve us.

Moving-up the value-chain is no longer assured protection: China is becoming a major source of intellectual property - in science, R&D, design, & entertainment. The reality of 1.3 billion people is that China can and will compete on the basis of low-wage labor and high-impact brains, at the same time.

Much of what we have long-wished for in China has occurred: a market economy is growing and Chinese people are better-off than they have ever been. China is presently the best bet for an Asian growth-engine, and a force for political stability. As China integrates into the global economy, some job relocation is to be expected.

Gradually, the Chinese will certainly import more as growth continues. In the meanwhile, look for a lot of political bluster on all sides, but little effective immediate resolution of the dilemma.
Source: Bill Fischer, ChinaBiz Sunday Column

No comments: