Global Financial Crisis
Global Financial Crisis
Chinese stimulus plan for exporters explained
Business Insider: Desperate China to flood the world with even cheaper goods
The marriage of inexpensive Chinese migrant labor (sons/daughters of rural farmers moving to the cities) and modern technology through re-investment has been one of the biggest contributors to the low inflationary environment of the past nearly two decades. This trend was facilitated primarily by exporters in Hong Kong/Taiwan/South Korea/Japan moving labor-intensive pieces of the value chain to China starting in the 1980s and accelerating in the 2000s (by contrast, American and European multi-nationals that invested in China have generally focused on the domestic Chinese market).
Many of these industries and their related supply chains have in many instances permanently migrated to the China low-cost manufacturing model. For example, in the television industry, most of the semiconductor components and glass display unit are produced in Taiwan, South Korea and Japan, with final assembly, test and quality assurance done in China. Frankly, if you have ever seen one of these assembly lines in China, it would be a huge step backward for America if they were to move that process back here. As such, protectionism (by trying to do just that) would have an inflationary effect in the long run. In the short run, there would be take up of excess labor but it would be minimal, and would be extremely costly – not to mention take a significant amount of time – to move back.
The article recognizes this fact and points out that the protectionism would largely be between other low-cost labor countries like Vietnam, Indonesia and Bangladesh. What the article fails to recognize that Chinese labor costs are already significantly higher than those countries and the reason why they are still dominant is because their productivity is also much higher due to the introduction of and investment in modern manufacturing technology and processes. Said differently, 2009 will probably see an increase in protectionism, but I don’t think on the same scale as during the 1930s when it was really the result (and effect) of a battle of idealogies.
The Chinese government is not hiding from the fact that they are providing an economic support package. The two major differences between their package other “developed world” support packages are that (i) they are supporting relatively healthy and extremely competitive industries through a period of severe demand shock and (ii) they can afford it.
This is very different from the billions of dollars that have gone to the U.S. financial and automobile industries despite the fact that (i) these industries have major structural issues that have yet to be solved in my opinion and (ii) the U.S. government and economy are in a much worse fiscal position. Moreover, tens of thousands of Chinese manufacturers have already gone out of business, so it is not like the stimulus package is geared towards propping up an over-supply situation.
What is more likely to happen is that the demand shock from North America and Europe will need to be filled by increases in consumer discretionary spending in China, as well as other still-growing economies like the Middle East, India and Southeast Asia. A less well-known fact (but something that makes some sense) is that export-oriented factories in China almost always have better quality products and are more often related to Hong Kong/South Korea/Taiwan/Japan firms. Factories geared towards the Chinese domestic market are lower quality and more likely to be domestic Chinese companies.
Where a big portion of the demand shock may be taken up is by forcing Chinese consumers to open their wallets a little more and buy higher quality products and more of them. That is why another big initiative by the Chinese government is to institute universal healthcare – recognizing that a huge reason why Chinese save so much is because they are so uncertain about their future and healthcare of the parents’ generation in a 1-child policy environment is likely the biggest concern. The question will be how fast such a policy can take effect, and whether it will have any positive effects on consumption in the short term.
P.S. Something else to point out. State banks in China have typically favored lending to state-owned enterprises. Those companies have been propped up by state loans, in effect to manage the flow of jobs from the state sector (100% of the economy 30 years ago) to the private sector (more than 50% today). Exporters are primarily foreign joint ventures (HK/Taiwan/South Korea/Japan) and in fact have typically been funded almost entirely through not with bank loans but foreign direct investment i.e. equity. The government initiative to start opening the spigot for exporters is actually a great development from a capitalist perspective, as loans are finally being made available to companies that have proven they can compete in the global economy.
This was originally published in a personal blog in January 2009.