Andy Xie had an interesting and important article in the MS GEF last Friday. He asks whether the epoch of China as a deflationary force on global prices may not be coming to an end. This is an interesting change of tack for Andy, since to date he has been on of the principal exponents of the Chinese 'reserve army of labour' argument wherby internal labour migration (estimated variously to have been of a magnitude of over 150 million people) drives down unit labour costs globally.
Andy is now speculating that this 'broad river' may now be reaching its limits. In particular difficulty in finding new migrants may be having an upwards impact on the 'cheapest cheap' wages. This has to happen at some stage, it is hard to tell whether we are there yet.
Xie speculates that this will impact on prices of products at 'big box retailers'. It will also influence the extent to which the cost push element of rising oil can be adsorbed. Otoh, Xie speculates that, as China moves up the value chain, the deflationary impact may still be felt in a broader range of end products.
China is not deflationary for the global economy at present, I believe. It could be an inflationary factor for one or two years due to cyclical and political reasons. Over time, China may become deflationary again when it moves up the value chain to re-price higher value-added products with Chinese costs. What matters to the market now is that China’s impact on global economy is becoming inflationary
The deflation winners, mainly big-box retailers, could see their gains reversed in the next year or two. Also, the major central banks may have to tighten into a slowing global economy, as the China factor no longer holds inflation back.
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