China’s next wave will hit our wallets
TEXT OF COMMENTARY
KAI RYSSDAL: Shares of Google have been through the wringer this spring. The stock is down 15 percent from its high last year. Today, at the company’s annual meeting, it was shareholders putting the company through its paces, mostly over Google’s doings in China. Investors brought two motions to the floor, one to insist that Google use all legal means to resist censorship. The other calls on the board of directors to set up a human rights committee. Neither one’s expected to pass, because Google executives say the company has to be in China.
Commentator and investment strategist Andy Rothman says just when we think we have a handle on China’s economic landscape, it changes.
ANDY ROTHMAN: China’s Communist Party has just kicked off a third wave of economic reform. It’s a process that should benefit Chinese workers, improve the global environment and lead to higher prices for American consumers.
The first wave of economic restructuring, in the 1980s, saw the breakup of communes and the return of wage labor. Special economic zones were established on the coast, where cheap labor fueled foreign-invested factories. Trade began to take off as China abandoned the Maoist principle of self-reliance and ended its global isolation. Soon, cheap goods would flood into the US. This pushed down prices and restrained manufacturing wages.
The second wave, in the 1990s, was the transfer of economic power from state-owned companies to entrepreneurs. It was a process symbolized by China’s decision to join the World Trade Organization. Over a six year period, 46 million state sector workers, the equivalent to Germany’s entire work force, were laid-off in China. The private sector grew fast enough to pick up the slack, and now contributes a surprising 70 percent of China’s GDP.
The third wave, just getting underway, is an effort to push China’s manufacturing platform up the value-added chain. Today, most of China’s exports are just assembled from imported components, and Beijing is hoping that in the future, more of the profit-creating parts will actually be made in China. The government is raising the minimum wage and enforcing environmental regulations. It’s also eliminating subsidies for the export of low-value, dirty products ranging from leather to toys, and steel and chemicals. This doesn’t mean China will quickly go high-tech, but Beijing is saying it no longer wants to be the world’s sweatshop for junk.
All of this is great for Chinese workers and the environment, but it also means that the global deflationary impact of cheap Chinese goods is coming to an end. Now all of us will have to pay part of the cost of higher Chinese wages and limits on overtime, and as Beijing enforces pollution controls, we will all have to start paying part of that expense, too.
RYSSDAL:Andy Rothman is with CLSA Asia-Pacific Markets. That’s an investment firm in Shanghai.
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