A lesson from corporate America ... that may come hard for China.
We yesterday received an email from someone responding
to our general perspective on China. While the email addressed most of
factors we already recognized, it did so with a different spin â€“ one
much more supportive of China and much more fearsome of the future of
Yes â€“ there are plenty of commentators with a
message, but likely few that are as well-reasoned and thoroughly
one item stood out; that is the fact that America must recognize what
the great nation it became ... and then get back to that. That that was â€śhard work and thrift.â€ť
There are notable signs that weâ€™re working on the
thrift part of the equation ... and while thereâ€™s plenty of hard work
still, itâ€™s unfortunately hard to find work right now. An article in The Wall Street Journal today reveals
new data on business cash piling:
pouring their money into building plants or hiring workers, nonfinancial
companies in the U.S. were sitting on $1.93 trillion in cash and other
assets at the end of September, up from $1.8 trillion at the end of
Federal Reserve said Thursday. Cash accounted for 7.4% of the companies'
assetsâ€”the largest share since 1959.
Among the biggest reasons for sitting on cash: the
consumer is still not in a place where he can spend much. The
Wall Street Journal has also put together a very nice
series of charts explaining the financial situation in the US. To
summarize: households are working to pay down debt, government debt is
quickly, household net worth is still trying to fight back from its 2008
plunge, asset markets have helped compensate for the negative wealth
flat-lined home values, consumer credit (while improving) remains
We keep hearing the same argument for fiscal
in a recession; here is the latest version:
â€ś ... our
â€śfiscal spaceâ€ť is limited â€“ we cannot afford to blithely increase our
debt. It can be done â€“ and should be done given the parlous state of our
economy and our disastrously high unemployment levels. But it must be
carefully, so we get as much stimulative effect on jobs as possible for
But what is interesting to us is that even going
to growth times in 2004 and 2005 the trajectory of government debt
has not changed. It begs the question: how long do we wait before making
meaningful slashes at public debt? Here is one of the charts as can be
the above link from The Wall Street
So our corporations have become thrifty, our
are working on it (the attitude change appears to be there), but our
is not (or cannot yet become, if youâ€™d prefer) more thrifty. What many
agree on, though, is that growth, domestically and globally, still very
hinges on the US consumer and, of course, China.
The latest trade data between the US and China was
reported today. The US deficit narrowed by 13% from September to
Chinaâ€™s surplus shrank by 16% from the October to November. On a
basis, US exports to China grew while Chinese exports to the US fell.
So letâ€™s revisit the Chinese yuan revaluation theme
The media has seized on the undervalued yuan as a
piece of the recently popularized â€ścurrency wars.â€ť A yuan that is
lower gives competitive advantages to Chinese producers, pricing out
producers/exporters. Make sense? Good.
We recently read an argument that a yuan revaluation
would be a negative for the US. This goes against common knowledge and
political posturing in the US that is inching nearer the need for
trade restrictions on China if they donâ€™t change their tune.
31 U.S. senators sent a letter to Wang Qishan, China's vice premier,
to solve several trade issues at the upcoming meeting.The
senators said they want to discuss
intellectual property disputes, "discriminatory innovation practices"
and barriers to U.S. beef exports, reaching solutions ahead of an
visit from Chinese President Hu Jintao in January. (CNNMoney.com)
Indeed, it is our belief that a stronger yuan can
to alleviate some imbalances in Chinaâ€™s economy and in those of its
There were several assumptions made in the argument.
One was that China would need to simultaneously strengthen its domestic
Yes. Another was that a stronger yuan would mean US imports from China
more costly for US consumers. Likely true.
But it was an assumption that it seems was not made,
and one other that was, that could make the difference.
First, the un-assumed part, US consumer attitudes
changed ... or may even still be changing. The nature of this recession,
begun with major erosion in net worth and culminated in lofty
been a wake-up call for many Americans.
Second, perhaps incorrectly assumed: US consumers
depend on Chinese imports, i.e. much of what the US imports from China
non-discretionary. Here is the breakdown of US imports from China in
3: Top US Imports from China 2009 ($ billion)
Source: US International Trade Commission
% change over 2008
Electrical machinery and equipment
Power generation equipment
Toys and games
Iron and steel
Footwear and parts thereof
Plastics and articles thereof
Leather and travel goods
Optics and medical equipment
Indeed, the top two items make up nearly 60% of
Chinese import volume to the US. And on the face of it, those two items
appear too discretionary. Meaning: businesses dependent upon these
goods and equipment might have little choice but to suffer through
stemming from a stronger yuan. But here are some things to keep in mind:
1) As the
cost of imports from China grows, production of the same items in the US
more feasible and the benefits of domestic production are felt
in the US are responding to the consumer and are sitting on cash,
to invest in capital goods until improvement on the consumer front.
3) We will
likely see further declines in volumes of the more discretionary imports
China until the US consumer recovers.
The way the aforementioned argument was presented
China would be forcing a painful adjustment on the US via a yuan
But does the US consumer not still hold the key? If Americans donâ€™t
buying again, and businesses donâ€™t start investing in capital goods
China), then who is really forced to accept painful adjustment?
Current account surplus countries must accept
domestic adjustment in a world of slower demand and global
Hard work and thrift is a gratifying goal for the
China has paid
lip-service to growing its domestic
demand; though some statistics show real progress has been made. Instead
using their banks as conduits to funnel consumer savings to state owned
enterprises, banks could start paying a more realistic rate on Chinese
deposits; that would be a good start. But
something China is extremely reluctant to
do given the composition of Chinese GDP is still heavy on the side of
and investment.This is part of that
domestic adjustment they must makeâ€”someday.They had better get cracking on empowering the Chinese consumer
the yuan issue gets nasty.
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