Consider the following tidbit that came in via a morning research compilation. I include it as sent, complete with misspellings and abbreviations.
Chinese 1Q urban employees salaries up 14.6% y/y, avg salary up 13.2% y/y
I do not know from whence the data came, nor do I know whether the 14.6% year-over-year increase in urban Chinese labor costs was “worse than expected” or “better than expected” or “in-line” with economist’s expectations.
But I do know that the “Chinese labor arbitrage” of which the bond bulls speak so approvingly continues apace…and while it is having a salutary effect on Wal-Mart’s cost of goods sold and Alan Greenspan’s CPI number, it is likewise having an inflationary effect on the Chinese labor market that would make a Peruvian Central Banker resign from his post, dig out the gold bullion from beneath his wine cellar and set sail for Bimini.
Only recently, fears of “a Chinese-led slowdown” caused Doomsday-Economist Steve Roach to jump to defect to the Bill Gross-led, Chinese-Labor-Arbitrage-Is-Deflationary side of the bond market food fight, about 50 basis points ago on the two-year treasury note (see “Even Armageddonists Need An Office” from June).
Yet today we read that the average Chinese urban salary—think about this for a minute—rose 14.6% in the first quarter.
I’m no math whiz, but I do know that 14.6% rounds up to 15%…and 15% a year doubles every five years.
In the words of Maxwell Smart, Agent 86 of CONTROL (why that show isn’t on cable TV somewhere in this great country of ours 24 hours a day is beyond me): “Would you believe, a Chinese-led reflation?”
Jeff Matthews
I Am Not Making This Up
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.
10 replies on “Would You Believe…A Chinese-Led Reflation?”
Well, 15% y/y increase (if true) is huge. On the other hand, these numbers in a rapidly “developing” economy can be very volatile, and a single one does not a trend make, and certainly does not take care of the much-reported over-capacity there.
Mr. Gross, on the other hand, is the guy who two years ago proclaimed the Bond Bull dead, so I wouldn’t place too much faith into his predictions – not any more than those of “leading economists”. Still waiting for those 5.2% TNX yields…
http://smallinvestorchronicles.blogspot.com/
china urban inflation does not preclude deflationary wage arb. there are spikes in important inflation (wages) all over. i have doubts that these will affect long yields anywhere. also, chinese and east asian (NOT india) savings/consumption functions are radically different from ours. fwiw.
Would You Believe…A Chinese-Led Reflation?
No, not if productivity in China is growing through massive capital investment spending over the last five years. I think continued low prices or negative prices out of China could happen.
I suppose you’ve seen the GaveKal comments regarding the profit squeeze in China. In a nutshell, Pearl river labor has gone from 700 yuan/mo. to 1100/mo., and shipping, oil, and most every raw material is up. WMT, Carrefour, or any western “platform” company goes to their Chinese supplier and points out that if the manufacturer doesn’t sell the item in question at the same price as last month that the buyer will walk down the street to another seller, or Vietnam, or wherever. There’s manufacturing overcapacity, and the buyer is in the driver’s seat. It’s why the China stock market is way down, and why China’s long bond has been so strong.
The link below is to a blog that deals with some of this issue in the first person.
http://worldmarket.blogspot.com/2005/
07/dial-1800savemyazz.html
Rich,
I saw Louis the other day — that is exactly where my counterpoint came from. He makes a pursuasive case for price containment.
OT……..i see Dirtydirtydeeds claims NBC is doing a special on naked short selling tomorrow. If its true perhaps now we know why OSTK delay its earnings annoucement until Wednesday ?????
Dirtydeeds is promoting the show on the OSTK yahoo message board
OSTK was promoting the naked short show on Dateline on their website ! ? ! Thats what the message baords are talking about and if its true perhaps we do know why the eanrings annoucement was delayed….Its certainly strange
Yes, I’ve seen the wage increase in person many many times. I worked as Mfg Program Manager for hardware at the largest software company. I managed large EMS as well as smaller Taiwanse EMS and 2nd tier suppliers in China. It’s really hard to find good middle managers and engineers as the young people with college degree who did not work for Chinese SOE (state owned enterprises – taints good work ethics)and fluency in English are in very HIGH demand. Some of these engineers often quit after year or 2 and leave for another firm with 25% plus raise (plus all the knowledge plus). I was getting tired of seeing my counterparts (mostly HK and Taiwanese) leave…
In fact I thought my 1st tier EMS was lying when he told me that we cannot ramp up production for Sept launch in summer of 2003 (bad year with SARS outbreak then summer power shutdowns) because they can’t find people in the huge factory town north of HK called Dongguan! I requested they pay little more money (like another $10/month as take home pay for assy workers are $60 or so) but to no avail due to training requirements.
So expect more wage increases. Why? Damn 1 child policy instituted in the 80’s. Lot more boys than girls. Imagine that… Million plus bachelors looking for women who got greedy and rather make easy money in the oldest profession.
Yep, China as we know today will be lot different in 10 years…
I need to visit China!