China’s GDP is still growing despite the fact that all the markets to which it exports have contracted. Stange no? I think we would do well to better understand China’s growth.
Famously China exports to the US. Since ’08 however the US consumer has not been. Consuming that is. At least not at anything like the pre-crash volume. So you might have expected China’s trade surplus to have contracted a bit. And so it did. It fell by a quarter in ’09 from its level in ’08. However foreign currency reserves have not gone down. The reeason is that foreign capital, not as a result of trade, just capital making its own way to China, has greatly increased.
The reasons aren’t hard to find. There has been a vast amount of capital from two sources. One is the capital that has flowed out of the Western Markets. That money has needed a home and been looking for a return. And not just any return. Losses have been suffered. Huge bad debts are still hanging like a dead weight. A really great return is what is needed. The same is true for the other sources of western capital – the bank bail out cash. That money has clearly NOT been invested back into the stock markets in America or Europe. Indeed in Europe the recent stimulus seems to have been put right back into the ECB by the recipient banks. They absolutely will not lend to each other. The interbank market is virtually shut. Yes, I know the libor and eurlibor are not at all time highs. So what? They are just NOT lending. They don’t trust each other as counterparties. Just like before and after Lehman. So all the cash is being deposited overnight at the ECB for overnight liquidity. Which is part of why we have not seen much ‘stimulus’.
Anyway, there has been an ocean of bail-out cash looking for a stonking return, to help ease losses and write downs at home. There is no such great return in the US or Europe, other than the HFT desks and currency speculation. So I think a lot of this hot money has been flowing to China.
And what has it done there Precious?
Well it has created a 23% increase of the M2 money supply above nominal GDP. What does this mean? It means the amount of money has increase at a rate no sane government would ever allow. The problem for China is it hasn’t been able to stop it. China does not control its money, or rather credit supply, any more than Europe or the US controls theirs. And its worse. That money has so far been frozen in property speculation. But that does not mean it is inert. It has fuelled infaltion – not in the value of the cash – but in the value of property. That makes some people rich but many, many other poorer as it creates a property bubble of immense proportions. For all the people it has made poorer relative to trying to buy a house, it innevitably feeds slowly through as pressure to increase wages. That feed through is here.
If the largest single purchase you wish to make, a house – is shooting up, then the buying power of your wage relative to that largest single purchase is nose-diving.
That pressure on wages is today’s problem. Tomorrow’s problem created form this lake of foreign cash is what happens if/when that capital tries to get out of property.
At the moment the Chinese authorities are in a stange position. They have a massively inflated money supply damned up behind an icewall of property speculation. Which when it melts will cause an epic flood. But in the mean time they have a cash shortage which they keep having to address by pumping MORE cash nto the banks. You can see how dodgey that is going to be to reverse.
But I want to return to the wage problem. For that is the more moveable and less reported-on feature of China’s growth. The financial media love to pretend that everyone in China is getting richer. Its all part of the great advance of China into the modern capitalist world. Except that wages have been kept very low. According to the All-China Federation of Trade Unions, nearly a quarter of Chinese employees have not had a raise in FIVE YEARS.
Low wages are – 98% of the Chinese growth ‘miracle’, No miracle at all. Just plain old – we can make our workers do it for less.
But now there is unrest. Foxconn is the world’s biggest electronic contrarct manufacturer. It has been in the news across China and the world because of the 12 suicides at their plant in Shenzhen in the last couple of months. Apple.com, now worth more than Microsoft, and whose computers are made there, has expressed ‘concern’. Nice of them.
Foxconn, based in Taiwan, has agreed to a 30% wage increase! NOT because their workers were formerly worked and worried to death in a profitable sweat-shop you realise. NO! Just because the owners are actually really generous people. At the same time the strike by Chinese Honda workers has garnered them a 24% pay rise. Agreed by a stricken and wrong footed management.
“We never expected something like this would happen,” said Tokoyo auto analyst Mamoru Kato. Never expected eh? Like US real estate analysts ‘never expected’ property prices to go down. Why do these people get paid for being SO UTTERLY clueless?
This particular genius went on to say, “After the Honda strike Chinese workers will likely be encouraged to start making more demands and such situations will inevitably increase production costs there.” FIle that under “No SHIT Sherlock.”
So put these two things together and I think changes are almost innevitable in China. Add these to the stores I have written about earlier and I think a coherent picture emerges.
Pressure for wage increases will grow. Property speculation is a vast bubble. When it bursts not only will lots of Chinese people be ‘poorer’ but there will also be a wave of money sloshing around.
Property speculation is unstable and so now is the pressure for wage increases.