The impact of China on the world economy
When a People's Bank of China Policy Board member was reported to have said a little more than a week ago that China planned to reduce its purchase of US Treasuries, the US dollar went into a tailspin. That incident highlights how important China has become in the world economy, adding to the influence it is already building up as a result of its burgeoning manufacturing muscle.
Back in the early 1990s, economists and investors woke up to the realisation that Asia had some of the most dynamic and competitive economies in the world. Funds flocked into the region, both for direct investment and portfolio investment. Basking in the admiration of foreigners, Asians became full of hubris and there was talk of the "Asian way" as the path to prosperity.
Then came the Asian Financial Crisis of 1997-98. The currencies of emerging Asian countries tanked, sending their economies into recession. The exception was China. The Chinese renminbi held up because, after all, China was indirectly the cause of the problem for the other Asian economies.
Another economy that held up was that of the United States. In fact, the US thrived in the late 1990s, with the US dollar rising not only against Asian currencies but most other major currencies as well, and the US stock market reaching unprecedented heights. Now, it was the turn of Americans to be infected with hubris. The US thought that it was experiencing a productivity miracle, helped by the innovative spirit of the "American way".
Eventually, however, the US stock market bubble burst, and now the US dollar is facing tremendous downward pressure as well. The cause of the weakness in the US dollar? The twin budget and current account deficits.
The budget deficit is the result of America's internal policies. The current account deficit partly derives from the budget deficit. However, the current account deficit is also to a large extent the product of a surging Chinese export machine which spews out manufactured goods and renders much of the manufacturing sectors in many other countries -- including America's -- uncompetitive.
Some commentators have likened the current US dollar weakness to an Asian Financial Crisis in reverse. Well, there is not exactly a crisis as yet. However, if one does eventuate, I would liken it more to the Asian Financial Crisis moving on to the US rather than a reversal. In both cases, the root cause is the same: the rise of China. China's impact is slowly moving from countries closest to it in development to countries further away.
After the Asian Financial Crisis, the Asian ex-China countries adjusted to the new economic reality and regained part of their competitiveness, mainly by adjusting their currencies downward. But they also adjusted by re-orienting their exports towards China. The Asian way proved to be the way of the dragon. The US may have to take similar steps or risk a recession, just like the Asian countries during the latter's own crisis.
As it is, the US is having trouble expanding employment. According to the latest US Bureau of Labor Statistics (BLS) employment report, total nonfarm payroll employment increased by 112,000 in November to 132.1 million, seasonally adjusted. This is lower than expected and, indeed, lower than hoped for. In particular, the manufacturing sector -- which is most affected by competition from China -- saw employment fall slightly. In fact, factory employment has shown little change since May.
It has only been in the past few years that the impact of China on jobs in western developed countries has become widely recognised. However, in the past year or so, the number of articles devoted to this topic has been coming at an increasingly fast and furious pace.
A recent article from BusinessWeek titled "Just How Cheap Is Chinese Labor?" showed just how competitive Chinese labour is. Lacking reliable data on manufacturing labour cost in China, the BLS hired a Beijing-based American consultant, Judith Banister, to come up with an estimate. The result was 64 US cents an hour. For comparison, hourly factory compensation in the US in 2002 was US$21.11. For 30 foreign countries covered by a BLS report, the average was US$14.22.
However, for those thinking that China depends on cheap labour alone, think again. In a recent BusinessWeek special report titled "The China Price", Harvard University economist Richard B. Freeman was quoted as saying: "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech. Combine the two, and America has a problem."
The article goes on to expand on China's range of advantages: "China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores, Target, Best Buy, and J.C. Penney."
Jim Hemerling, a senior vice-president at Boston Consulting Group's Shanghai office, sums it up well: "There is a myth that the US would remain the knowledge economy and China the sweatshop. Increasingly, this is no longer the case."
The rest of Asia learnt that lesson in the late 1990s. It's now America's turn.
Back in the early 1990s, economists and investors woke up to the realisation that Asia had some of the most dynamic and competitive economies in the world. Funds flocked into the region, both for direct investment and portfolio investment. Basking in the admiration of foreigners, Asians became full of hubris and there was talk of the "Asian way" as the path to prosperity.
Then came the Asian Financial Crisis of 1997-98. The currencies of emerging Asian countries tanked, sending their economies into recession. The exception was China. The Chinese renminbi held up because, after all, China was indirectly the cause of the problem for the other Asian economies.
Another economy that held up was that of the United States. In fact, the US thrived in the late 1990s, with the US dollar rising not only against Asian currencies but most other major currencies as well, and the US stock market reaching unprecedented heights. Now, it was the turn of Americans to be infected with hubris. The US thought that it was experiencing a productivity miracle, helped by the innovative spirit of the "American way".
Eventually, however, the US stock market bubble burst, and now the US dollar is facing tremendous downward pressure as well. The cause of the weakness in the US dollar? The twin budget and current account deficits.
The budget deficit is the result of America's internal policies. The current account deficit partly derives from the budget deficit. However, the current account deficit is also to a large extent the product of a surging Chinese export machine which spews out manufactured goods and renders much of the manufacturing sectors in many other countries -- including America's -- uncompetitive.
Some commentators have likened the current US dollar weakness to an Asian Financial Crisis in reverse. Well, there is not exactly a crisis as yet. However, if one does eventuate, I would liken it more to the Asian Financial Crisis moving on to the US rather than a reversal. In both cases, the root cause is the same: the rise of China. China's impact is slowly moving from countries closest to it in development to countries further away.
After the Asian Financial Crisis, the Asian ex-China countries adjusted to the new economic reality and regained part of their competitiveness, mainly by adjusting their currencies downward. But they also adjusted by re-orienting their exports towards China. The Asian way proved to be the way of the dragon. The US may have to take similar steps or risk a recession, just like the Asian countries during the latter's own crisis.
As it is, the US is having trouble expanding employment. According to the latest US Bureau of Labor Statistics (BLS) employment report, total nonfarm payroll employment increased by 112,000 in November to 132.1 million, seasonally adjusted. This is lower than expected and, indeed, lower than hoped for. In particular, the manufacturing sector -- which is most affected by competition from China -- saw employment fall slightly. In fact, factory employment has shown little change since May.
It has only been in the past few years that the impact of China on jobs in western developed countries has become widely recognised. However, in the past year or so, the number of articles devoted to this topic has been coming at an increasingly fast and furious pace.
A recent article from BusinessWeek titled "Just How Cheap Is Chinese Labor?" showed just how competitive Chinese labour is. Lacking reliable data on manufacturing labour cost in China, the BLS hired a Beijing-based American consultant, Judith Banister, to come up with an estimate. The result was 64 US cents an hour. For comparison, hourly factory compensation in the US in 2002 was US$21.11. For 30 foreign countries covered by a BLS report, the average was US$14.22.
However, for those thinking that China depends on cheap labour alone, think again. In a recent BusinessWeek special report titled "The China Price", Harvard University economist Richard B. Freeman was quoted as saying: "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech. Combine the two, and America has a problem."
The article goes on to expand on China's range of advantages: "China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores, Target, Best Buy, and J.C. Penney."
Jim Hemerling, a senior vice-president at Boston Consulting Group's Shanghai office, sums it up well: "There is a myth that the US would remain the knowledge economy and China the sweatshop. Increasingly, this is no longer the case."
The rest of Asia learnt that lesson in the late 1990s. It's now America's turn.
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