Sunday, December 26, 2010

Chinese conundrum - Perspectives

America has lost many manufacturing jobs and the US unemployment rate is still nearly 10%.

“If you look at some of the big companies that have grown so strongly in the US in the past 20 years, a lot of it has been because of the ability of the US to import from China” Jim O,Neill Goldman Sachs Mr Morici is pretty angry about that too. "Certainly, there are things that China should be exporting to the US because of its cheap labour," he says.

He believes, however, that it would not be cost effective to make certain things in China, but for the fact that its currency is 40% undervalued. "The idea behind free trade is that it be in two directions so that we each get to specialise in what we do best and we grow from there," he says."But China is exporting products where it has a comparative advantage and protecting those where it doesn't." He points out that China has enough surplus labour to replace all the manufacturing workers in Europe, the US, Australia, New Zealand and Mexico. "Do we really want to live in a world where everything is made in China and the rest of us just borrow money from the Chinese?" he asks.

Jim O'Neill from Goldman Sachs has an alternative perspective. He is not responsible for the company's trading tactics - his job is to forecast accurately and he has a great record of correctly predicting the rise of China and the rebound of the euro after earlier troubles. Mr O'Neill says the US trade deficit with China is now falling sharply."The US current account deficit year-to-date is running about half what it was before the crisis and the Chinese trade surplus is not much more than 3% of GDP."

He believes, however, that due to the rather emotional atmosphere in Washington, such data seems to be completely ignored by Congress.

"It is slightly scary because they are talking about things which are a little bit out of date," he says. Job losses in the US have included white collar workers as well manufacturing positions."I've come across people that quite bizarrely - in my judgement - blame China for the loss of every manufacturing job in the United States in the past 20 years and that is ridiculous," he says. "If you look at some of the big companies that have grown so strongly in the US in the past 20 years, a lot of it has been because of the ability of the US to import from China - WalMart being a particularly good example," he explains.

"The unemployment situation linked to the US economic cycle, and the weakness of the past two years, is very severe and of course it is understandable that not only US politicians, but also workers, blame other people - and China seems to be a convenient scapegoat," he says.There is also criticism that job losses have gone too far in America because the Chinese currency is not at a fair "market clearing" value, but Mr O'Neil has no sympathy with that viewpont. "The Chinese currency has risen by over 20% the past five years. Chinese import growth is rising at over 40% - in the year to date, Chinese import growth has been close to $400bn.“You also have to acknowledge that there was blind greed on behalf of builders and landowners round the country”

Many people would argue that such figures are mainly due to the import of raw materials."No it is not," says Mr O'Neil. "Look at countries that are really good at exporting, like Germany.Some of Germany's top companies are employing people on overtime purely because of exports to China."

He points out how many branded goods companies around the world, Louis Vuitton being a particularly good example, are literally being transformed by the strength of Chinese demand and Chinese imports.

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