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goldminingXpert (30.65)

Warm-Up Post Before I Get Down to the Real Stuff

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May 20, 2009 – Comments (27) | RELATED TICKERS: CHINA

China is an economic basket case that is heading into a decade-long (or longer) depression reminscent of Japan 1990-2009. I've said this here numerous times and been criticized numerous times. Well, Paul Krugman seems to see trouble for China as well. Besides his comments, I also offer this article:

 

China loses low-cost manufacturing crown to India, Mexico: Study
20 May 2009, 1702 hrs IST, AGENCIES

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SHANGHAI: China has lost its position as the world's lowest-cost components manufacturer to India and Mexico, a study indicated Wednesday, in a
blow for the Asian giant as it fights the financial crisis.

The United States has also significantly closed the gap to the degree that China's total manufacturing costs are now only six percent below those of American factories, the study by AlixPartners business consultants indicated. [good luck China--you're going to need it. Without a cost advantadge, your crappy products aren't going anywhere. Speaking of crap--I wouldn't be buying any couches from China if I were you.]

"Gone are the days when companies could see cost savings of 30 percent or more by making 'no-brainer' manufacturing-footprint and outsourcing decisions, to China in particular," said Stephen Maurer, a managing director at the firm.

The company, which specialises in helping distressed businesses, compiled its Manufacturing-Outsourcing Cost Index by analysing a basket of manufactured components and assembled parts, ranging from small motors to die castings.

It compared the cost of making the items in China, India, Brazil and Mexico versus the US, tracking changes over three years in factors such as labour, overheads, exchange rates, transportation, and raw material costs.

The index showed major shifts in costs over the past six months that pushed China down the rankings and Mexico now on top, the firm said in a statement.

It predicted China's costs would improve in the second half of 2009, as more moderate oil prices and the economic slowdown reduced sea shipping costs, but added the country was unlikely to catch up with India and Mexico this year.

Meanwhile, US plants have become much more competitive, but their costs are still much higher than most of the countries studied, the firm said.
 

27 Comments – Post Your Own

#1) On May 20, 2009 at 5:04 PM, JakilaTheHun (99.93) wrote:

Good post.  I've been slowly, but surely drifting closer towards China beardom, too.  Still think there are a few buys here and there in China, but I think the best "China plays" are normally American and European companies that operate in China.  Chinese manufacturing is going to suffer significantly as US spending stays at levels significantly suppressed from the mid-decade highs. 

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#2) On May 20, 2009 at 5:15 PM, mrindependent (75.33) wrote:

There is an inescapable link between Chinese manufacturing competitiveness and the value of the Chinese Yuan.  Currently, the Yuan is significantly undervalued - even though it appreciated approximately 30% in five years.  I am sure that the appreciation affected the competitiveness numbers in the studies you cite.  When I went to China, I saw that wages were increasing rapidly in real terms.  This also hurts competitiveness.  On the other hand, the Chinese government uses all sorts of tricks to manipulate international trade.  The most important trick is printing Yuan to purchase as many dollars as necessary in order to keep the Yuan devalued versus the US dollar.  How will it all play out?

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#3) On May 20, 2009 at 5:17 PM, goldminingXpert (30.65) wrote:

How will it all play out?

Badly. Anything involving government heavy-handedly manipulating the economy usually does.

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#4) On May 20, 2009 at 5:25 PM, binve (< 20) wrote:

GMX:

Badly. Anything involving government heavy-handedly manipulating the economy usually does. 

I'll drink to that.

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#5) On May 20, 2009 at 6:41 PM, StevesStox (75.41) wrote:

GMX: Already pulling the plug on season 1 of "Plunge"? We were all enjoying the Plunge: "America" series so much, why switch to season 2; Plunge: "China" so fast?

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#6) On May 20, 2009 at 6:49 PM, goldminingXpert (30.65) wrote:

@#5--I no longer waste time responding to trolls.

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#7) On May 20, 2009 at 6:53 PM, Alex1963 (29.30) wrote:

GMX

I respect your opinions but I think you are way off on China at least for the next 6-12 months. I like any economy with massive reserves the way I like companies with the same position. I think China can adjust to nearly anything they wish to. I wouldn't underestimate their resourcefulness to even move beyond relying on the dubious distinction of being the world's resource for scut labor. Just as we in the U.S. will need to adapt to not being the world's primary consumer of every damn thing imaginable they will need to move beyond relying on their old economic model. Of all the major economies I like their odds far more than any elses even ours. Plus they take a very long view IMO. Tho so far I'm pretty bullish overall on The U.S. too. Time will tell.

I posted my take in a few places if you're interested

From today: 

http://caps.fool.com/blogs/viewpost.aspx?bpid=197448&t=01007422989251003253&source=ihpsitcag0000002#comment198006 

from an earlier blog of yours (which you never responded to btw, you big meanie LOL)

 http://caps.fool.com/Blogs/ViewPost.aspx?bpid=165721&t=01008631960540474609 

I hope finals went, or are going, well.

All the best

Alex 

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#8) On May 20, 2009 at 7:31 PM, uclayoda87 (29.86) wrote:

I agree with Alex1963, having significant cash reserves, central control and no need for political correctness does give China an advantage.  They were burdened with years of communism, overpopulation and a relative lack of natural resources.  They were in a much worse position than the US or Russia, but of the three, they appear to be the smart pig that built the brick house.  They may have their problems, but their government understands that they need to keep their people working to produce "stuff" which has real value.  Giving their own people a gradual taste of wealth with managed expectations will help allign the incentive of their people with the central plan of their government, which of couse is to stay in power.

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#9) On May 20, 2009 at 7:39 PM, goldminingXpert (30.65) wrote:

I agree with Alex1963, having significant cash reserves, central control and no need for political correctness does give China an advantage.  They were burdened with years of communism, overpopulation and a relative lack of natural resources.  They were in a much worse position than the US or Russia, but of the three, they appear to be the smart pig that built the brick house.  They may have their problems, but their government understands that they need to keep their people working to produce "stuff" which has real value.  Giving their own people a gradual taste of wealth with managed expectations will help allign the incentive of their people with the central plan of their government, which of couse is to stay in power.

You believe socialism/communism works. I don't. 

When you say this, my eyes vomit:

central control [. . .] does give China an advantage.

I couldn't disagree with this statement more. Central control brought them massive pollution, a horribly manipulated currency, and a dysfunctional society. End result? Most likely--chaos.

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#10) On May 20, 2009 at 7:41 PM, goldminingXpert (30.65) wrote:

I respect your opinions but I think you are way off on China at least for the next 6-12 months. I like any economy with massive reserves the way I like companies with the same position.

Won't disagree that massive reserves are good. Saving>spending.

Plus they take a very long view IMO.

This is very true and a very big edge. However, I feel that their pollution problems, the vast gulf between rich/poor (far wider than here), and their incompetent government will eventually bring them down.

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#11) On May 20, 2009 at 8:47 PM, Alex1963 (29.30) wrote:

GMX 

In a world leaning heavily towards gov't intervention who might have an edge- those who have been at it for years or those trying it out on a major scale for the 1st time? 

I know you'd likely expand on your points in ideal circumsatances-maybe you're tight for time? But I still don't see how their gov't is any more incompetent, dishonest or ill intentioned (depending on your political preferences of course) that most if not all major economies- including ours for the last 8 years and/or now (depending on your politics). They have been the growth leader for what, 8 years by most measurements? Not too shabby. So they manipulate their currency so do we really and is that a compelling enough reason to say they aren't a good investment?.  So they have massive polution and resource shortages building-so do we you could look at it is an opportunity for infrastructure projects and I have read that's just what they are doing.

Vast gulf between rich/poor- so do we and most "capitalist" economies. I think it is a pretty accepted observation that the middle class poulations worldwide have & are continuing to shrink, the poor are poorer the rich are richer. China may have an advantage in that there people are used to deprivation and sacrifice. There isn't the "entitlement" angle like here or in 1st world Europe. Notice I'm leaving out Canada and Australia. But they are two other economies I like also assuming the U.S. rebounds which helps Canada, and China stays strong helping Australia.

To me the major issue is whether China can leverage themselves to super power/parity with U.S. status. if they can they can dictate the playbook. I think the T-bill situation has if nothing else has resolved them to try to obtain that same advantage or at least minimize a future replay of being at the mercy of a "hostile' reserve currency. They have the money, the manpower, the political flexibility, the land and resources (or they're buying them up), and the socio-economic room to grow. This downturn still leaves them less devastated than any other recently booming nation. And unlike India which has the population growth, the cheap labor, the land and similar socio political brething room to expand amiddle class w/o upsetting the powers that be, China is not hampered by a representative sytem of gov't. India also has rampant and entrenched corruption which is more devatating in their (and our) economic & political model then China's IMO.

I belive this makes them a highly likely good gamble for at least a while yet. Of course I'm not a buy and holder really anymore. But as a swing trader I see a lot of opportunity there even with a bullish outlook.

Anyway, I'm sure you'll do fine whichever way you play your portfolio but I do think there is a compelling alternative viewpoint for all the GMX followers (of which I'm one as you know). Also I do like Indias prsopects but not as much as China or the U.S. And I am not endorsing totalitarianism (tho I do support Obama :) just noting it's advantages in times like these. I see China becoming far less restrictive over time despite their best efforts to avoid it. Propsperity will ensure it IMO.  

REC #18 FROM ME

Best

Alex 

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#12) On May 20, 2009 at 9:03 PM, ciahomia (< 20) wrote:

Yes, you are correct that their government heavy-handedly manipulating the economy, but FYI in China, not just the federal government has massive reserves even the individual states it self has its own reserve, last year to make the economy rolling again, after an unimaginable of unemployment rate, many states in china pumping cash into China state promoted infrastructure. Years ago many analyst believes that Chinese manufacturing is going to suffer significantly cause by its own industrial competitiveness, to date I still see the same China.

just look at how they maneuvered the currencies, and still #1 lender to the US

 

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#13) On May 20, 2009 at 9:12 PM, ciahomia (< 20) wrote:

Alex1963 comment: This downturn still leaves them less devastated than any other recently booming nation.

Totally Agree

India also has rampant and entrenched corruption which is more devatating in their (and our) economic & political model then China's

Totally Agree

 

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#14) On May 20, 2009 at 9:40 PM, goldminingXpert (30.65) wrote:

Alex--I'll write a whole new post for this. I don't have time right now and you make multiple good points which I must address to fairly answer your comment.

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#15) On May 20, 2009 at 9:49 PM, assafer (< 20) wrote:

Another macroeconomic worry for the long term will be the shortage of women in Chinese culture.  Because of the taxation on kids many parents are selling or abandoning their girls.  This may pose a problem for China 20-30 years down the line.  Shorter term (2-10 years down the road), they do own lots of American debt, and I would be a bit more bullish on them.  

 

                      May all your trades be prosperous,

                                          Assafer

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#16) On May 20, 2009 at 11:41 PM, goldminingXpert (30.65) wrote:

Good point assafer.

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#17) On May 20, 2009 at 11:56 PM, TMFMmbop (96.61) wrote:

Paul Krugman spends a week in China and suddenly he's an expert? I have as much respect for his opinions as I have for the highly politicized Nobel Prizes that are awarded these days. 

China needs to diversify its economy away from manufacturing, yes, but if you don't think the global economic focus is shifting off of the US an onto places like China and Brazil, then you are not properly preparing for the next 25 years. The Bank of China is opening a branch in Brazil, and though some have dismissed it, I expect that China and Brazil do ultimately start trading without dollars. That's obviously a big step toward a convertible currency, but that won't fully happen until Chian feels it has diversified itself far enough away from export manufacturing. 

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#18) On May 21, 2009 at 12:21 AM, starbucks4ever (99.52) wrote:

"I couldn't disagree with this statement more. Central control brought them massive pollution, a horribly manipulated currency, and a dysfunctional society."

I beg to disagree. Whatever problems it brought them, you must credit the Chinese government for the one child policy. If they hadn't done that, there would now be 2 billion Chinese eating each other for supper. 

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#19) On May 21, 2009 at 12:53 AM, booyahh (< 20) wrote:

"Central control brought them massive pollution, a horribly manipulated currency, and a dysfunctional society."

 Huh? Industrialization brought them pollution, not central control. As for the manipulated currency, that seems to have worked out quite well for their exports. And as for central control bringing them a dysfunctional society, how has lifting millions of people out of poverty brought them a dysfunctional society? Poverty is the greatest form of abuse and dysfunction. If you don't believe me, just try being poor and starving for a few weeks. It sucks.

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#20) On May 21, 2009 at 1:07 AM, goldminingXpert (30.65) wrote:

Huh? Industrialization brought them pollution, not central control.

And they industrialized why? Oh, that's right. The central control of the currency which caused their goods to be unnaturally cheap thus leading to an abnormally high amount of manufacturing leading to an abnormally deadly amount of pollution. State control equals centalized fiascos.

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#21) On May 21, 2009 at 1:54 AM, JakilaTheHun (99.93) wrote:

I'd disagree that China is "socialist" or "communist".  They might call themselves "Communist", but labels don't mean crap.   

China's issues have little to do with their governmental structure.  For the most part, their governmental structure makes more sense than ours.  Historically speaking, centralization has worked more often for large states.  It's simply not possible to effectively govern a large state while being pulled in twelve different directions. 

In China, policy making is more of a technocratic process, whereas, here, we're subject to random whims.  Most of our political debate focuses on wedge issues like abortion, gays, etc.

I'm not suggesting that we need Chinese-like centralization.  Our society is organized differently.  But we do need very far-reaching reforms of the Federal structure.  American Federalism doesn't work any more.  It's going to have to be reinvented with more of a focus on localization (the founders' original intent) and we're going to have to split up these massive Goliath states like California and Texas.  Large states tend to lend themselves towards centralization, as I said.  The only way to avoid that sorta of centralized control is to make our own states smaller and more governable.

And here's America's major problem:  none of that reform is going to happen.

---------

But back to China.  China's problem isn't centralization.  It's lack of openness.  The US's great advantage over the rest of the world is that people aren't afraid of speaking out here.  People are allowed to be more creative.  Due to this, we end up with pioneers in many industries.  The success in Silicon Valley in the '90s would have never been possible without the openness of American culture.

China's other big problem --- poor decisionmaking (which often results from lack of openness and debate).  They put themselves in a circular loop.  Their economy hummed so long as Americans were buying.  Americans were buying so long as the Chinese were financing America's debt.  The Chinese were financing America's debt so long as the economy was humming.  It was bound to break down eventually. 

Now China is whining and blaming us for their own poor decisions.  They criticize us for taking steps that will increase inflation, but we basically have to do that in order to escape the deflationary cycle.  But for the Chinese, an American deflationary cycle is exactly what they want.  Being the largest holders of American debt, deflation means that China's investment strengthens, while our national wealth gets funneled outward to them.

 -----

I still think China has made significant strides over the past 30 years.  They will continue to make progress in the future, but the next few years are going to be rough.  Don't forget that the US suffered more than most countries in the Great Depression due to be a manufacturing power and exporter at the time.  Yet, the US eventually came out on top a few decades later.  Our ascension was expedited by the complete destruction of Europe and Japan in WWII, though.  China's still going to have a backseat for a few more decades until it gets its own cards in order.

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#22) On May 21, 2009 at 2:00 AM, uclayoda87 (29.86) wrote:

goldminingXpert

My description of China was not meant to voice my support for a socialist or communist system, but to point out that China runs like a successful company, which started from a humble beginning.

Look at companied like Apple, with a focused leader and initial employees who were paid in stock.  Their incentive were aligned and their product was of real value.  China has copied this business model.

Now look at California or the US government.  If these were companies, how would you rate them?  The employees in these two companies can do whatever they want and waste the companies assets, while not producing anything of value.  When they start to run low on cash, they just borrow some more.

I am a partner in a small business with more than 70 employees and an annual revenues of greater than $11 million.  We produce things of value and the employees receive bonuses based on our profits.  We also have very little employee turnover, so I have to believe that the incentive to stay and be productive is achieved by our compensation package.  We have a strong central leadership group which sets the goals and expectations for the company.  We expect and receive the support of our employees.  Our company has remained profitable for more than 30 years and we remain profitable even today.  So if my company was a country or state, would it look more like China or California?

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#23) On May 21, 2009 at 2:35 AM, kaskoosek (97.84) wrote:

I am still bullish on China and I disagree with GMX on this one.

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#24) On May 21, 2009 at 3:31 AM, portefeuille (99.78) wrote:

link to the article

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#25) On May 21, 2009 at 3:34 AM, JibJabs (94.88) wrote:

I will be going to China in August for 10 months - indefinitely. I don't know much yet but I can say with certainty that it is far more complicated than can be conveyed along the standard binaries that have been referred to here (socialism/ capitalism, open/ closed, etc.). 

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#26) On May 21, 2009 at 4:10 AM, portefeuille (99.78) wrote:

I would not consider losing the "low-cost manufacturing" jobs a bad thing. Germany has lost those to coutries like the Czech Republic, subsequently they lost them to Romania and now they lose them to Ukraine (see this!!!), and so on.

Of course Germany could still produce cheap clothes but I think moving towards the productions of Porsches and solar technology and towards services (including financial services (yes, I prefer a job at Deutsche Bank to a job at a Chinese or Mexican sweatshop)) has been a wise move actually.

Losing the jobs at the "lower end" is a good thing as long as you replace them with jobs at the "higher end".

So in terms of economic development of a country losing those jobs is a feature not a bug.

 

 

 

(I think this has been one of my better comments. It may have helped that on quite a few occasions I had to give this reply to my father when he started complaining that we lose all those manufacturing and mining jobs. So far he has never really fully agreed though, so maybe my argumentation needs to be improved ...)

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#27) On May 23, 2009 at 7:34 PM, selfdestruct2 (57.21) wrote:

What's a troll here ? I fear I may be a troll !

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