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Surya Yalamanchili: Currency Just Tip of China Iceberg

by on September 28, 2010

In the past few weeks the media has been abuzz with stories about China’s currency manipulation. Given the stratospheric unemployment rate and bulging trade deficit, focusing on China’s questionable trade practices is long overdue. Mercantilism. That’s the term for the policy path that China has been following. Mercantilism is the practice by which a nation “protects” its economy by doing everything it can to encourage exports and discourage imports. Essentially, it’s the inverse of American economic policy. Our policy is all about borrowing from the rest of the world to pay for imports from the rest of the world. While most of us are familiar with our policy of importing nearly everything thanks to any time spent at a Wal*Mart, we’re still unfamiliar with how China does business, so let’s take a closer look. First, China encourages exports. They essentially subsidize the costs of production in a variety of forms. Their behavior ranges from a lump-sum cash payment to spur growth in an industry, giving big discounts on utilities or other raw material costs, discounted (or free) land/factories, large low-interest loans, etc. Second, China actively discourages imports. They do everything they can to make it difficult or expensive for foreign companies to sell in China. Tariffs are the simplest way to do this: add a fee on top of any good being imported making it more expensive . Regulatory barriers are more common– complicated rules and laws are created to make it nearly impossible for foreign firms to comply with, with the intention of keeping them from market. Another common practice is forcing foreign companies to partner with a local firm or requiring technology transfers to develop a strong eventual Chinese competitor. Currency manipulation lives above all of these policies. When a country’s currency is undervalued it makes their exported goods cheaper in the rest of the world while simultaneously making it more expensive for their citizens to buy foreign goods. It has the dual effect of boosting exports while shrinking imports. The net effect of these policies has been a massive Chinese revolution. In just a few short decades, China has essentially become the factory to the world. Consequently scores of jobs have fled the US, consumers mounted a back-breaking debt load to cope with the broken employment market, and China’s ownership of our debt has allowed them to, at times, effectively dictate American policy. China’s policies went from a brewing problem to that of a global crisis with their admittance to the WTO in 2001. Despite China’s fierce mercantilist policies, our leaders gave little concern for what the impact would be for American production and workers. As we focused on the “war on terror,” China found that they would get little, if any, pushback to their anti-US policies. Slowly the relationship found it’s equilibrium, starkly in the favor of China acting with impunity. While China built their production capabilities and raised the standard of living for millions, they simultaneously began financing the ever-growing massive amounts of money that Americans wanted to borrow. In a nutshell, as they laid the groundwork for the industries that would provide employment and wealth for the future, they also began to finance the American lifestyle. Today China is both our largest supplier and creditor. We buy goods that we used to make from them, with money borrowed from them. But we shouldn’t pretend that the undervalued Chinese currency alone caused our current sad state of affairs — nor that it alone will fix it. China chooses to invest their excess savings in American debt because each passing day only increases their leverage over us. Our position only grows weaker with each passing dollar and so our best chance is to work with the European Union, Japan and the rest of the world to confront these unfair practices. Currency is just the tip of the China iceberg. We must recognize the current global war for capital and jobs that is being waged. A war that doesn’t deal in rockets or tanks but in factories and financial leverage. Recognizing this new reality will lead us to designing a system of tax, regulatory, educational, and trade policies that set us up for a real recovery and a long-term sound economy. If we don’t, our economy will remain on a course of full speed ahead for the Chinese iceberg. This is the third in the series “A Business Plan for America” that will outline critical public policy proposals that are free of partisan politics, ideology and dead ideas. http://votechili.com/businessplan

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Surya Yalamanchili: Currency Just Tip of China Iceberg

Unemployment Rate Unchanged In July — Employers Cut 131,000 Jobs

by Ryan McCarthy on August 6, 2010

WASHINGTON (AP) — Private employers added new workers at a weak pace for the third straight month, making it more likely economic growth will slow in the coming months. The jobless rate was unchanged at 9.5 percent. The Labor Department said Friday that companies added a net total of 71,000 jobs in July, far below the roughly 200,000 needed each month to reduce the unemployment rate. Overall, the economy lost a net total of 131,000 jobs last month, as 143,000 temporary census jobs ended. The department also said that businesses hired fewer workers in June than it had previously estimated. July’s private-sector job gains were revised down to 31,000 from 83,000. May was revised up slightly to show 51,000 net new jobs, from 33,000. The “underemployment” rate was the same as in June, at 16.5 percent. That includes those working part time who would prefer full-time work and unemployed workers who’ve given up on their job hunts. All told, there were 14.6 million people looking for work in July. That’s roughly double the figure in December 2007, when the recession began. Even if hiring picks up, it will take years to regain all the jobs lost during the recession. The economy lost 8.4 million jobs in 2008 and 2009. This year, private employers have added only 559,000 jobs.

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Unemployment Rate Unchanged In July — Employers Cut 131,000 Jobs

China’s Cheap Labor Era Is Ending — And These Products Are About To Get More Expensive

July 19, 2010

The end of the cheap, “Made-in China” era is near — and it’s going to affect your bottom line. Soaring labor costs fueled by worker shortages and social unrest , an appreciating currency and rapid increases in the price of raw materials and energy are all making it more expensive for manufacturers to operate in China. As China’s rising labor costs ripple through the global economy, consumers should expect to pay higher prices for a broad array of goods. “A lot depends on the labor content of what you’re importing,” says James Angel, a professor of economics at Georgetown University. “When you buy that iPhone, how much of the cost is actually reflected in the final assembly?” For higher-end items like electronics, assembly accounts for a small part of the overall cost. “Skilled labor content — that is, the research and development, the packaging, the marketing — is the largest component of the total cost,” says Angel. Even cheaper goods like clothing could be impacted. Labor and assembly expenses make up a much larger share of the overall cost of production for these less expensive goods, and small changes are likely to have a disproportionate effect. The Hong Kong Trade Development Council (HKTDC) estimates that rising wages and the appreciation of the renminbi will cause production costs in China’s factories to jump five to nine percent. And, if you think prices won’t increase because manufacturing in China will shift to cheaper labor markets like Vietnam and Bangladesh, think again. Analysts say China’s competitiveness as a locus for manufacturing is not based on price alone, but rather on a number of factors including the quality of the output, delivery lead time and the country’s flexibility in meeting different order requirements. We’ve compiled a list of goods likely to become more expensive for U.S. consumers as production costs in China continue to rise:

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Greece Risks Debt-Rating Downgrade if Fiscal Targets Missed, Moody’s Says

February 25, 2010

By Keiko Ujikane and Aki Ito Feb. 25 (Bloomberg) — Greece’s sovereign debt rating may be cut within months unless the country meets the objectives of its fiscal deficit reduction plan, Moody’s Investors Service said. “If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Pierre Cailleteau, managing director of sovereign risk at the ratings company, said in an interview in Tokyo today. Such a departure may merit a cut of “a couple of notches,” he said. Cailleteau spoke a day after Standard & Poor’s said it may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. At the same time, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures, Cailleteau said. Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to A2, he said. Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings. If Moody’s cuts its credit rating to the same level as the other major ratings companies, Greek government bonds would no longer be eligible as collateral at the European Central Bank, making it more difficult for the nation to borrow. To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net Aki Ito in Tokyo at aito16@bloomberg.net

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Moody’s Says Greece Risks Downgrade Within Months If Fiscal Plan Is Missed

February 24, 2010

By Keiko Ujikane and Aki Ito Feb. 25 (Bloomberg) — Greece may see its sovereign debt rating cut within months should it fail to meet the objectives in its fiscal deficit reduction plan, Moody’s Investors Service said. “If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Pierre Cailleteau, managing director of sovereign risk at the ratings company, said in an interview in Tokyo today. Such a departure may merit a cut of “a couple of notches,” he said. Cailleteau spoke a day after Standard & Poor’s said it may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. At the same time, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures, Cailleteau said. Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to A2, he said. Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings. If Moody’s cuts its credit rating to the same level as the other major ratings companies, Greek government bonds would no longer be eligible as collateral at the European Central Bank, making it more difficult for the nation to borrow. To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net Aki Ito in Tokyo at aito16@bloomberg.net

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Greek Crisis May Slow Trichet’s Push to Scale Back ECB Stimulus Measures

February 8, 2010

By Gabi Thesing Feb. 9 (Bloomberg) — The European Central Bank may be forced to delay the withdrawal of emergency lending measures because it could inflame financial-market concerns about Greece, Spain and Portugal, economists said. Investors are already dumping those countries’ assets as their governments struggle to rein in budget deficits, making it more expensive for them to finance the debt. Should the ECB push ahead with its exit strategy by pulling its unlimited cash support for euro-area banks, interest rates could rise, further undermining confidence in Europe’s economic recovery. “Banks in Greece, Spain and Portugal are disproportionately dependent on cheap ECB cash so any whiff of that drying up and weakening the banking sector further will rattle markets ,” said Colin Ellis , an economist at Daiwa Capital Markets in London. That “strengthens the case for the ECB to slow down its exit.” The ECB wants to withdraw the measures it introduced to nurse Europe through its worst recession since World War II to avoid inflation down the road. It has already announced it will stop giving banks 12 and 6-month loans, and will decide next month whether to revert to an auction procedure in its refinancing operations. The ECB currently lends banks as much cash as they want at its 1 percent benchmark rate . Next Step ECB officials including Juergen Stark , Yves Mersch , Axel Weber and Erkki Liikanen have said they favor a return to conventional measures as soon as economic and financial-market conditions allow. Weber said on Jan. 27 that the next step in the ECB’s exit could be taken before the end of the first half. Economists including Laurent Bilke , who previously worked at the ECB, said the central bank should hold off returning to an auction in its main weekly tender until at least the second half of the year. He said a return to normal refinancing operations would drive the Eonia overnight rate , or the interest European banks charge each other for overnight loans, about 70 basis points higher toward the ECB’s 1 percent benchmark. “If the ECB exits too soon, it could exacerbate problems for the weaker economies that are most sensitive to short-term market rates, making it more difficult and expensive for their governments and banks to borrow,” said Bilke, now at Nomura International in London. “There is also a risk that euro-area money markets could seize up again, disrupting credit flow to the euro-area economy.” The economy of the 16 nations sharing the euro will grow 0.8 percent this year, the ECB predicted in December. It contracted about 4 percent last year, according to the European Commission. The ECB will publish new forecasts after its policy meeting on March 4. Trichet ‘Confident’ “The Governing Council will, in early March, take decisions on the continued implementation of the gradual phasing out of the extraordinary liquidity measures that are not needed to the same extent as in the past,” ECB President Jean-Claude Trichet said last week. He was “confident” Greece would reduce its budget deficit to below the European Union’s limit of 3 percent of gross domestic product by 2012. Concerns about Greece’s ability to cut the deficit from almost 13 percent of GDP are spreading to the euro region as a whole as investors speculate about a possible default and even a break-up of the currency union. As the cost of insurance against Greek, Spanish and Portuguese sovereign defaults last week rose to a record, European stocks posted the biggest weekly slump in 11 months and the euro plunged to an eight-month low. ‘Bank Panic’ “Plenty of European banks have stuffed their balance sheets with Greek debt,” said Peter Vanden Houte , an economist at ING Group in Brussels. “If they did default, it would create a new round of bank panic.” Eric Nielsen , chief European economist at Goldman Sachs International in London, said Greece is in a worse situation than Spain and Portugal and its impact on market confidence should be limited. “If we are wrong” and “contagion from Greece engulfs other countries, then up to 20 to 30 percent of euro-zone GDP could be under severe stress,” Nielsen wrote in a note to clients this week. “Were a major financial instability event to develop, we would expect the ECB to pause in its exit strategy, and then, if needed, reverse course and reinstate longer-term financing.” “The ECB shouldn’t engage in any tightening at the moment,” said Julian Callow , an economist at Barclays Capital in London. Policy makers “should avoid getting egg on their face at Easter,” he said. To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net ;

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Video: Resler Sees Encouraging Elements in December Jobs Report: Video

January 8, 2010

Jan. 8 (Bloomberg) — David Resler, chief U.S. economist at Nomura Securities, talks with Bloomberg’s Carol Massar and Matt Miller about the U.S. labor market. The U.S. unexpectedly lost 85,000 jobs in December, supporting Federal Reserve forecasts that a labor market recovery will take time and making it more likely interest rates will stay near zero for the next six months. (Source: Bloomberg)

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