drezner.foreignpolicy.com
Bond markets react wildly to blinding glimpse of the obvious
Thu, 01/22/2009 - 4:35pm
Felix Salmon reviews Tim Geithner's written testimony and concludes that, "Geithner's answers are highly diplomatic and content-free,"
The bond market, however, appears to disagree:
Mr. Geithner’s strong words on China have resulted in a sharp selloff in Treasurys. In testimony to Congress, Geithner wrote, in response to a question from Sen. Olympia Snowe, (R-Maine), that President Obama’s administration “backed by the conclusions of a broad range of economists - believes that China is manipulating its currency.”
“He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”
As the FT's Krishna Guha and Alan Beattie write, "experts said the declaration could fuel trade tensions at a time of global recession and fast-rising unemployment."
I'm as concerned about this as the next guy, but let's be careful here and parse things out.
The bond market is conflating two issues here. The first is that Geithner said out loud what everyone knows to be true. And, to be sure, before the U.S. responds to currency manipulation, it has to say that it's happening. So Geithner's statement is a quasi-first step.
The second issue, however, is what kind of action Obama and Geithner are planning. Beattie and Guha suggest options like, "punitive import tariffs on Chinese goods."
This is where a closer look at Geithner's written testimony would be a good idea. Here are the two relevant passsages:
[W]e look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China's growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home....
[T]he best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.
Two signals here. First, Geithner seems more concerned about China expanding its domestidc growth than with any manipulation of the yuan right now -- a conviction shared by Brad Setser, incidentally.
Second, it seems pretty clear that Geithner's first option on the currency issue is jaw-jaw rather than protect-protect. In other words, the bond market should have reacted more like Felix Salmon.
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Showing posts with label China. Show all posts
Showing posts with label China. Show all posts
Friday, January 23, 2009
More on Obama - Geithner China comments
January 23, 2009
Geithner Hints at Harder Line on China Trade
By JACKIE CALMES
WASHINGTON — Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.
Mr. Geithner’s comment was made in writing to the Senate Finance Committee hours before it voted 18 to 5 to recommend that the full Senate confirm him. The statement, which is certain to anger the Chinese government, comes at a particularly sensitive time, with economies in both the United States and China weakening and tensions already rising around the globe over trade.
The United States, moreover, is increasingly dependent on China to finance its ballooning deficit.
An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.
It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.
“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Mr. Geithner wrote. He stopped short of charging that China is manipulating its currency intentionally to gain an unfair trade advantage, as the 1988 law requires for an official citation of currency “manipulation.”
Even so, the Obama administration’s restatement of that position in writing on its second day was immediately seen as significant. The Bush administration purposely did not use the term “currency manipulator” to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies.
The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at a competitive disadvantage against lower-priced Chinese goods.
“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.
But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”
Prices of Treasury debt fell modestly after news of Mr. Geithner’s comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency. The yield on the 30-year bond, which moves in the opposite direction from its price, climbed to 3.247 percent from 3.159 percent on Wednesday afternoon.
Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing.
The Obama official, who did not want to be identified because of the sensitivity of Mr. Geithner’s confirmation process, cited the Treasury nominee’s earlier oral testimony to the Finance Committee. “As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system,” the official said, “in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment.”
As a senator, Mr. Obama supported legislation as recently as last year that would open the door to trade sanctions against China for currency manipulation.
Mr. Geithner’s statement was in response to a written question about the new administration’s stance that was submitted by Senator Charles E. Schumer, Democrat of New York, a vocal critic of China’s currency policies.
On Thursday, Mr. Schumer welcomed Mr. Geithner’s reply. “For the first two days, this is a big step” from the Obama administration, he said in an interview. “And I think it’s an indication: They are not going to be anti-free trade; they are not going to be for putting artificial barriers in the way. But when other countries do, they’re going to be much tougher on them.”
The National Association of Manufacturers, whose members have pushed previous administrations to get tougher with China, was pleased, but also cautious given the potential for a confrontation that could exacerbate global woes.
“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”
Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.
“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”
Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to appreciate nearly 20 percent.
Mr. Geithner would be as aware of China’s sensitivity as anyone, and no one has suggested that he made his statement in error. Before taking his current post as president of the Federal Reserve Bank of New York, Mr. Geithner was a policy director at the I.M.F. Before that, he was the under secretary of the Treasury for international affairs in the Clinton administration, a crisis manager during the Asian financial crisis of the 1990s and a Treasury attaché to Japan. By his own description, Mr. Geithner’s expertise is in matters of currency exchange rates and monetary policy.
In his written statement to the Senate panel, Mr. Geithner further noted Mr. Obama’s support as a senator for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”
“The question is how and when to broach the subject in order to do more good than harm,” he added. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
The full Senate is expected to confirm Mr. Geithner, 47, as Treasury secretary on Monday. Some Republican senators blocked a vote for this week, given lingering objections about Mr. Geithner’s failure until recently to pay about $34,000 in payroll taxes on his income at the I.M.F. from 2001 to 2004.
He was roundly criticized in his Finance Committee hearing on Wednesday, but its bipartisan vote reflected members’ opinion that Mr. Geithner’s expertise outweighed his personal tax lapses. Those were “completely unacceptable,” said Senator Kent Conrad, Democrat of North Dakota. “In normal times that alone would lead me to oppose his nomination. These are not normal times.”
All the panel’s Democrats and five of the 10 Republicans voted for Mr. Geithner.
“I’m convinced he’s a person of great integrity even though he’s made these mistakes,” said Senator Orrin G. Hatch, Republican of Utah. But another Republican, Senator Michael B. Enzi of Wyoming, said, “I’m really disappointed that we’re even voting on this,” given that other nominees had been disqualified for less.
Vikas Bajaj contributed reporting from New York.
Geithner Hints at Harder Line on China Trade
By JACKIE CALMES
WASHINGTON — Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.
Mr. Geithner’s comment was made in writing to the Senate Finance Committee hours before it voted 18 to 5 to recommend that the full Senate confirm him. The statement, which is certain to anger the Chinese government, comes at a particularly sensitive time, with economies in both the United States and China weakening and tensions already rising around the globe over trade.
The United States, moreover, is increasingly dependent on China to finance its ballooning deficit.
An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.
It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.
“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Mr. Geithner wrote. He stopped short of charging that China is manipulating its currency intentionally to gain an unfair trade advantage, as the 1988 law requires for an official citation of currency “manipulation.”
Even so, the Obama administration’s restatement of that position in writing on its second day was immediately seen as significant. The Bush administration purposely did not use the term “currency manipulator” to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies.
The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at a competitive disadvantage against lower-priced Chinese goods.
“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.
But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”
Prices of Treasury debt fell modestly after news of Mr. Geithner’s comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency. The yield on the 30-year bond, which moves in the opposite direction from its price, climbed to 3.247 percent from 3.159 percent on Wednesday afternoon.
Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing.
The Obama official, who did not want to be identified because of the sensitivity of Mr. Geithner’s confirmation process, cited the Treasury nominee’s earlier oral testimony to the Finance Committee. “As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system,” the official said, “in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment.”
As a senator, Mr. Obama supported legislation as recently as last year that would open the door to trade sanctions against China for currency manipulation.
Mr. Geithner’s statement was in response to a written question about the new administration’s stance that was submitted by Senator Charles E. Schumer, Democrat of New York, a vocal critic of China’s currency policies.
On Thursday, Mr. Schumer welcomed Mr. Geithner’s reply. “For the first two days, this is a big step” from the Obama administration, he said in an interview. “And I think it’s an indication: They are not going to be anti-free trade; they are not going to be for putting artificial barriers in the way. But when other countries do, they’re going to be much tougher on them.”
The National Association of Manufacturers, whose members have pushed previous administrations to get tougher with China, was pleased, but also cautious given the potential for a confrontation that could exacerbate global woes.
“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”
Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.
“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”
Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to appreciate nearly 20 percent.
Mr. Geithner would be as aware of China’s sensitivity as anyone, and no one has suggested that he made his statement in error. Before taking his current post as president of the Federal Reserve Bank of New York, Mr. Geithner was a policy director at the I.M.F. Before that, he was the under secretary of the Treasury for international affairs in the Clinton administration, a crisis manager during the Asian financial crisis of the 1990s and a Treasury attaché to Japan. By his own description, Mr. Geithner’s expertise is in matters of currency exchange rates and monetary policy.
In his written statement to the Senate panel, Mr. Geithner further noted Mr. Obama’s support as a senator for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”
“The question is how and when to broach the subject in order to do more good than harm,” he added. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
The full Senate is expected to confirm Mr. Geithner, 47, as Treasury secretary on Monday. Some Republican senators blocked a vote for this week, given lingering objections about Mr. Geithner’s failure until recently to pay about $34,000 in payroll taxes on his income at the I.M.F. from 2001 to 2004.
He was roundly criticized in his Finance Committee hearing on Wednesday, but its bipartisan vote reflected members’ opinion that Mr. Geithner’s expertise outweighed his personal tax lapses. Those were “completely unacceptable,” said Senator Kent Conrad, Democrat of North Dakota. “In normal times that alone would lead me to oppose his nomination. These are not normal times.”
All the panel’s Democrats and five of the 10 Republicans voted for Mr. Geithner.
“I’m convinced he’s a person of great integrity even though he’s made these mistakes,” said Senator Orrin G. Hatch, Republican of Utah. But another Republican, Senator Michael B. Enzi of Wyoming, said, “I’m really disappointed that we’re even voting on this,” given that other nominees had been disqualified for less.
Vikas Bajaj contributed reporting from New York.
The Global "Adverse Feedback Loop"
from www.bloomberg.com
Roubini, Edwards Predict Slump in S&P 500 on China (Update3)
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By Michael Patterson and Adam Haigh
Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.
Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.
Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.
“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”
Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.
Emperor’s Clothes
“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”
The consensus among eight strategists surveyed by Bloomberg this week is for the index to end the year at 1,066. The S&P 500 fell 1.5 percent yesterday to 827.50, and futures on the index dropped 2.2 percent as of 4:32 a.m. in New York.
Data at China’s National Bureau of Statistics is gathered in a “scientific and realistic method,” Ma Jiantang, the agency’s director, said at a briefing in Beijing yesterday in response to a question about the accuracy of government figures. Zhang Yingxiang, a spokeswoman for the statistics bureau, declined further comment when contacted by phone today.
China Stocks Fall
China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in the previous year, the fastest in the world. China’s CSI 300 Index fell 0.6 percent at the close in Shanghai, the biggest drop in eight days. Commodity producers led declines after Aluminum Corp. of China Ltd. and Yunnan Copper Industry Co. reported lower profit.
Economists at JPMorgan Chase & Co., Citigroup Inc., the World Bank and the International Monetary Fund all predict China will grow at least 7 percent this year, while investors Jim Rogers and Mark Mobius are buying Chinese shares on expectations the government will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 percent in 2007 from 17.2 percent in the previous year.
China, which has $1.9 trillion set aside in the world’s largest reserves, plans to spend at least 4 trillion yuan on bridges, housing and tax breaks to boost the economy. Chinese President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties.”
China Recession?
Rogers, who predicted the start of the commodities rally in 1999, recommends investors buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy.
“China could be in recession, I have no idea and it’s not relevant to me because I’m using my judgment as to what will happen six months from now,” said Rogers, who authored books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”
“There is a lot happening in China and there will be those that will hold up well.”
China’s economy will grow 6.3 percent this quarter from a year earlier, according to the median estimate of nine economists surveyed by Bloomberg after yesterday’s GDP report.
China’s electricity output declined 7.8 percent in November from a year earlier and fell 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. Manufacturing shrank for a third month as the deepening global recession cut demand for the nation’s toys, clothes and electronics.
‘Manipulating’ the Yuan
Edwards said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.
The yuan appreciated about 19 percent against the dollar between 2005 and July 2008 as China redressed what U.S. officials saw as an unfair price advantage for exports. The yuan has since stabilized at about 6.85 per dollar. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday that China is “manipulating” its currency.
The yuan fell the most in a month today as the nation’s banks refuted the new U.S. administration’s accusation.
“If you amble your way through the analysis, you realize if push comes to shove they will devalue” the yuan, Edwards said. That may spur lawmakers in the U.S. and China to increase trade barriers, he said.
To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net. Last Updated: January 23, 2009 05:50 EST
Roubini, Edwards Predict Slump in S&P 500 on China (Update3)
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By Michael Patterson and Adam Haigh
Jan. 23 (Bloomberg) -- Stocks will retreat around the world because of shrinking demand from China as growth in the third- biggest economy slows, said Nouriel Roubini, the New York University professor who predicted last year’s financial crisis.
Global equities will fall 20 percent from current levels as China, which contributed 19.5 percent to total growth in 2007, contends with its slowest expansion in seven years, he said. Wall Street strategists predict the Standard & Poor’s 500 Index will rise 29 percent this year from the closing level yesterday.
Roubini, an economics professor at NYU’s Stern School of Business, said China already is in a “recession” despite government data showing a 6.8 percent fourth-quarter growth rate, as power output drops and manufacturing shrinks.
“Demand is falling in China, they’re over-invested in capacity and there’s a global supply glut,” Roubini, 50, said in a telephone interview. “It has very, very important implications.”
Roubini’s view is shared by Societe Generale SA global strategist Albert Edwards, who was correct in forecasting in March 2007 that a U.S. contraction would spur a bear market in equities. Edwards says the China slowdown will reduce earnings at industrial, energy and raw-materials companies, worsening a selloff in emerging and developed-market stocks that may send the S&P 500 down 40 percent to 500.
Emperor’s Clothes
“People should be thinking really hard about this rather than sticking their heads in the sand,” said Edwards, a London- based strategist and member of the top-ranked global investment strategy team in Thomson Extel’s surveys the past three years. “We’re just pointing out when the emperor doesn’t have any clothes on.”
The consensus among eight strategists surveyed by Bloomberg this week is for the index to end the year at 1,066. The S&P 500 fell 1.5 percent yesterday to 827.50, and futures on the index dropped 2.2 percent as of 4:32 a.m. in New York.
Data at China’s National Bureau of Statistics is gathered in a “scientific and realistic method,” Ma Jiantang, the agency’s director, said at a briefing in Beijing yesterday in response to a question about the accuracy of government figures. Zhang Yingxiang, a spokeswoman for the statistics bureau, declined further comment when contacted by phone today.
China Stocks Fall
China’s economy grew 9 percent for all of 2008 after a 13 percent expansion in the previous year, the fastest in the world. China’s CSI 300 Index fell 0.6 percent at the close in Shanghai, the biggest drop in eight days. Commodity producers led declines after Aluminum Corp. of China Ltd. and Yunnan Copper Industry Co. reported lower profit.
Economists at JPMorgan Chase & Co., Citigroup Inc., the World Bank and the International Monetary Fund all predict China will grow at least 7 percent this year, while investors Jim Rogers and Mark Mobius are buying Chinese shares on expectations the government will bolster economic growth with interest-rate cuts and fiscal stimulus. The IMF said China’s contribution to global growth increased to 19.5 percent in 2007 from 17.2 percent in the previous year.
China, which has $1.9 trillion set aside in the world’s largest reserves, plans to spend at least 4 trillion yuan on bridges, housing and tax breaks to boost the economy. Chinese President Hu Jintao has pledged further measures to maintain stable growth in the face of “serious challenges and difficulties.”
China Recession?
Rogers, who predicted the start of the commodities rally in 1999, recommends investors buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy.
“China could be in recession, I have no idea and it’s not relevant to me because I’m using my judgment as to what will happen six months from now,” said Rogers, who authored books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”
“There is a lot happening in China and there will be those that will hold up well.”
China’s economy will grow 6.3 percent this quarter from a year earlier, according to the median estimate of nine economists surveyed by Bloomberg after yesterday’s GDP report.
China’s electricity output declined 7.8 percent in November from a year earlier and fell 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. Manufacturing shrank for a third month as the deepening global recession cut demand for the nation’s toys, clothes and electronics.
‘Manipulating’ the Yuan
Edwards said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.
The yuan appreciated about 19 percent against the dollar between 2005 and July 2008 as China redressed what U.S. officials saw as an unfair price advantage for exports. The yuan has since stabilized at about 6.85 per dollar. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday that China is “manipulating” its currency.
The yuan fell the most in a month today as the nation’s banks refuted the new U.S. administration’s accusation.
“If you amble your way through the analysis, you realize if push comes to shove they will devalue” the yuan, Edwards said. That may spur lawmakers in the U.S. and China to increase trade barriers, he said.
To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net. Last Updated: January 23, 2009 05:50 EST
Thursday, January 22, 2009
Obama's Geithner: China manipulates Yuan
from http://www.bloomberg.com/
Obama Deems China ‘Manipulating’ Yuan, Geithner Says (Update2)
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By Rebecca Christie
Jan. 22 (Bloomberg) -- Timothy Geithner, PresidentBarack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.
Geithner also said, in written responses to questions from Senate Finance Committee members, that there are “no current plans” to request more financial bailout funds. He played down any need to nationalize U.S. banks, without specifically ruling out the option.
The remarks on China’s exchange rate policy may presage a tougher American line with the nation that is the biggest foreign investor in U.S. government debt. Former Treasury Secretary Henry Paulson preferred diplomacy over confrontation with China to resolve trade disputes and, in semiannual reports, refrained from labeling the country an illegal “manipulator” of its currency.
“President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner said in the remarks, which were posted on the Senate Finance Committee Web site today. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
Characterizing China’s policy as manipulation is “a very substantial change” by the Obama administration, said Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington.
‘Bent Over Backwards’
“It’s certainly something the Bush administration bent over backwards to avoid,” Lardy said. “It sounds also like he’s giving himself a little bit of wiggle room, saying we’ll take it up when we think it’ll be most effective” and not necessarily as an immediate issue.
Geithner said that in the short term, China should pursue “more aggressive” efforts to boost economic growth, in concert with a similar U.S. economic stimulus package.
The finance panel is expected to vote on Geithner’s nomination today.
The Obama administration is continuing to weigh a proposal to spur home buying by driving down mortgage rates, he said.
“The primary objective of the proposal to provide 4.5 percent mortgages is to assure that affordable mortgages are available to qualified borrowers,” Geithner said. “We share the objective and will continue examining proposals aimed at increasing the flow of credit to qualified borrowers.”
One version of the proposal would use Fannie Mae and Freddie Mac, the federal-chartered mortgage finance companies seized by the government in September, to reduce 30-year fixed home-loan rates to around 4.5 percent, from a current average of about 4.96 percent.
To contact the reporter on this story: Rebecca Christie in Washington atRchristie4@bloomberg.net;Last Updated: January 22, 2009 11:05 EST
Obama Deems China ‘Manipulating’ Yuan, Geithner Says (Update2)
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By Rebecca Christie
Jan. 22 (Bloomberg) -- Timothy Geithner, PresidentBarack Obama’s nominee for Treasury secretary, said the new U.S. administration believes China is “manipulating” its currency.
Geithner also said, in written responses to questions from Senate Finance Committee members, that there are “no current plans” to request more financial bailout funds. He played down any need to nationalize U.S. banks, without specifically ruling out the option.
The remarks on China’s exchange rate policy may presage a tougher American line with the nation that is the biggest foreign investor in U.S. government debt. Former Treasury Secretary Henry Paulson preferred diplomacy over confrontation with China to resolve trade disputes and, in semiannual reports, refrained from labeling the country an illegal “manipulator” of its currency.
“President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner said in the remarks, which were posted on the Senate Finance Committee Web site today. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
Characterizing China’s policy as manipulation is “a very substantial change” by the Obama administration, said Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington.
‘Bent Over Backwards’
“It’s certainly something the Bush administration bent over backwards to avoid,” Lardy said. “It sounds also like he’s giving himself a little bit of wiggle room, saying we’ll take it up when we think it’ll be most effective” and not necessarily as an immediate issue.
Geithner said that in the short term, China should pursue “more aggressive” efforts to boost economic growth, in concert with a similar U.S. economic stimulus package.
The finance panel is expected to vote on Geithner’s nomination today.
The Obama administration is continuing to weigh a proposal to spur home buying by driving down mortgage rates, he said.
“The primary objective of the proposal to provide 4.5 percent mortgages is to assure that affordable mortgages are available to qualified borrowers,” Geithner said. “We share the objective and will continue examining proposals aimed at increasing the flow of credit to qualified borrowers.”
One version of the proposal would use Fannie Mae and Freddie Mac, the federal-chartered mortgage finance companies seized by the government in September, to reduce 30-year fixed home-loan rates to around 4.5 percent, from a current average of about 4.96 percent.
To contact the reporter on this story: Rebecca Christie in Washington atRchristie4@bloomberg.net;Last Updated: January 22, 2009 11:05 EST
Thursday, September 25, 2008
China Banks say NO! to US Banks
China banks told to halt lending to US banks-SCMP
Wed Sep 24, 2008 9:52pm EDT
BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.
A spokesman for the CBRC had no immediate comment. (Reporting by Alan Wheatley and Langi Chiang; editing by Ken Wills)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Wed Sep 24, 2008 9:52pm EDT
BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.
A spokesman for the CBRC had no immediate comment. (Reporting by Alan Wheatley and Langi Chiang; editing by Ken Wills)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Tuesday, June 24, 2008
China and Japan relations improve
from http://www.nytimes.com/
June 25, 2008
Japanese Warship Visits Chinese Port
By HOWARD W. FRENCH
SHANGHAI — In the first such visit since the Second World War, a Japanese naval warship steamed into a Chinese port on Tuesday, docking at a heavily guarded naval base in Guangdong Province for a five-day port of call.
The visit of the 4,650-ton destroyer Sazanami, which was billed as an earthquake relief mission, is being seen by many military and diplomatic analysts as part of a broad and gradual reconciliation between the two countries, the pace of which has quickened since a five-day visit to Japan in May by Chinese President Hu Jintao.
“When a naval vessel visits, it sends a clear signal that the countries have buried the hatchet and are working for peace,” said Gao Hong, director of the political research office of the Chinese Academy of Social Science’s Japanese Research Institute. “This is the clearest sign yet of the improvement in relations between the two countries. It says they no longer harbor animosity toward each other.”
Mr. Hu’s visit was the first by a Chinese head of state in a decade, and was seen by commentators in both countries as having moved Japan and China in the direction of a closer and friendlier working relationship.
Relations between the two neighbors have long been cool, in large part because of China’s lingering resentment of Japan’s conquest and occupation of this country between 1931 and 1945.
Mr. Hu’s visit was followed almost immediately by the devastating earthquake in Sichuan Province on May 12 that killed almost 70,000 people, and Japan earned a measure of goodwill here by being among the first countries to provide relief assistance.
Last week, the two countries also agreed on terms for the joint development of natural gas fields in disputed territorial waters of the East China Sea.
Each step in the reconciliation has brought reminders, however, of the depth of nationalist sentiment in China and of lingering emotions in some quarters against Japan. The warship visit, for example, was originally intended to take place early this month, according to Chinese media reports, but was postponed, ostensibly because of the political sensitivities.
As it is, the port of call is closed to most media, and the ship’s visit will be unusually low-key for a goodwill mission. The conservative Japanese newspaper, Sankei Shimbun, for example, reported that a planned concert performance by a Japanese naval band had been canceled and that access for Japanese media to the port had been restricted.
“We are considering the possible reaction of the Chinese people,” said Takashi Sekine, a Japanese Defense Ministry spokesman, according to Reuters. “We need to consider the situation.”
A Chinese Foreign Ministry spokesman, Liu Jianchao, denied that Chinese public opinion opposed the port call. “Strengthening our exchanges and cooperation in the field of defense will be supported by the people and I don’t think there will be any public anger,” he said in a news conference in Beijing.
The recent agreement over the development of gas fields in the East China Sea, however, illustrated the continued sensitivity of political developments involving Japan. Beijing handled the announcement of the agreement with unusual circumspection, and as word of the agreement spread, it quickly drew expressions of outrage from many Chinese Internet commentators. Chinese censors have busily removed many of the comments since then.
On Tuesday, there was a similar flurry of blogging activity, with one online commentator writing, “as long as Japan hasn’t made a formal apology for the history of invading into China, hasn’t stopped the domestic action of glorifying the invading history, we will oppose any of the Japanese military force coming again into China.”
Another reminder of sensitivities here came shortly after the earthquake, at a time when China was desperate to provide shelter for the affected populations of Sichuan Province. Japan offered to fly in tents and other emergency supplies aboard a military aircraft, but China appeared to change its mind on the airlift idea after considering the likely hostile public reaction to military aircraft from Japan.
An editorial in the state-run China Daily newspaper acknowledged the potential for controversy regarding the naval visit, but said that the Japanese ship visit was part of an effort to “build trust and dispel each other’s doubts.”
Saw the movie Children of Huang Shi last night. Moving picture with the brutal Japanese invasion of China as the background. Recommend watching. I dont think China Japanese relations will ever be anything beyond an uneasy and wary calm.
June 25, 2008
Japanese Warship Visits Chinese Port
By HOWARD W. FRENCH
SHANGHAI — In the first such visit since the Second World War, a Japanese naval warship steamed into a Chinese port on Tuesday, docking at a heavily guarded naval base in Guangdong Province for a five-day port of call.
The visit of the 4,650-ton destroyer Sazanami, which was billed as an earthquake relief mission, is being seen by many military and diplomatic analysts as part of a broad and gradual reconciliation between the two countries, the pace of which has quickened since a five-day visit to Japan in May by Chinese President Hu Jintao.
“When a naval vessel visits, it sends a clear signal that the countries have buried the hatchet and are working for peace,” said Gao Hong, director of the political research office of the Chinese Academy of Social Science’s Japanese Research Institute. “This is the clearest sign yet of the improvement in relations between the two countries. It says they no longer harbor animosity toward each other.”
Mr. Hu’s visit was the first by a Chinese head of state in a decade, and was seen by commentators in both countries as having moved Japan and China in the direction of a closer and friendlier working relationship.
Relations between the two neighbors have long been cool, in large part because of China’s lingering resentment of Japan’s conquest and occupation of this country between 1931 and 1945.
Mr. Hu’s visit was followed almost immediately by the devastating earthquake in Sichuan Province on May 12 that killed almost 70,000 people, and Japan earned a measure of goodwill here by being among the first countries to provide relief assistance.
Last week, the two countries also agreed on terms for the joint development of natural gas fields in disputed territorial waters of the East China Sea.
Each step in the reconciliation has brought reminders, however, of the depth of nationalist sentiment in China and of lingering emotions in some quarters against Japan. The warship visit, for example, was originally intended to take place early this month, according to Chinese media reports, but was postponed, ostensibly because of the political sensitivities.
As it is, the port of call is closed to most media, and the ship’s visit will be unusually low-key for a goodwill mission. The conservative Japanese newspaper, Sankei Shimbun, for example, reported that a planned concert performance by a Japanese naval band had been canceled and that access for Japanese media to the port had been restricted.
“We are considering the possible reaction of the Chinese people,” said Takashi Sekine, a Japanese Defense Ministry spokesman, according to Reuters. “We need to consider the situation.”
A Chinese Foreign Ministry spokesman, Liu Jianchao, denied that Chinese public opinion opposed the port call. “Strengthening our exchanges and cooperation in the field of defense will be supported by the people and I don’t think there will be any public anger,” he said in a news conference in Beijing.
The recent agreement over the development of gas fields in the East China Sea, however, illustrated the continued sensitivity of political developments involving Japan. Beijing handled the announcement of the agreement with unusual circumspection, and as word of the agreement spread, it quickly drew expressions of outrage from many Chinese Internet commentators. Chinese censors have busily removed many of the comments since then.
On Tuesday, there was a similar flurry of blogging activity, with one online commentator writing, “as long as Japan hasn’t made a formal apology for the history of invading into China, hasn’t stopped the domestic action of glorifying the invading history, we will oppose any of the Japanese military force coming again into China.”
Another reminder of sensitivities here came shortly after the earthquake, at a time when China was desperate to provide shelter for the affected populations of Sichuan Province. Japan offered to fly in tents and other emergency supplies aboard a military aircraft, but China appeared to change its mind on the airlift idea after considering the likely hostile public reaction to military aircraft from Japan.
An editorial in the state-run China Daily newspaper acknowledged the potential for controversy regarding the naval visit, but said that the Japanese ship visit was part of an effort to “build trust and dispel each other’s doubts.”
Saw the movie Children of Huang Shi last night. Moving picture with the brutal Japanese invasion of China as the background. Recommend watching. I dont think China Japanese relations will ever be anything beyond an uneasy and wary calm.
Tuesday, June 17, 2008
China + 1 Manufacturing
from www.nytimes.com
June 18, 2008
Labor Costs Rise, and Manufacturers Look Beyond China
By KEITH BRADSHER
HANOI — Canon is no longer building or expanding factories in China, but the company is doubling its workforce at a printer factory outside Hanoi to 8,000.
Nearby, Nissan is expanding a vehicle engineering center. Hanesbrands, the underwear company based in Winston-Salem, N.C., is building two new factories here, as is the Texhong Textile Group from Shanghai.
China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.
A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.
More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.
Companies are using the China-plus-one strategy to mitigate the risks of overdependence on factories in one country.
Multinational corporations are “thinking about all the world and keeping a balance” between China and other countries, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory, which sells to Wal-Mart and Kohl’s, is building a factory in Vietnam to supplement its three factories in China.
Companies remaining in China are desperately seeking to control costs.
“We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest manufacturers of cotton and spandex fabric.
To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared to China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia.
In China, where rural villages are running low on able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour work week, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour work week that includes a full day on Saturdays.
Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs — on top of a 12 percent increase last year. New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.
When those increases are combined with a currency rising against the dollar at an annual pace of up to 10 percent, labor costs in China are now climbing at 25 percent a year or more in dollar terms.
Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.
China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.
Foreign direct investment in China has grown by a third over the last three years. By contrast, foreign direct investment has more than doubled in this period in the Philippines, quintupled in India, and soared more than eight-fold in Vietnam.
Faster rates of increase in other Asian countries partly reflect lower starting points. but investment is still growing quickly, and now it’s growing from high levels. For example, foreign investment in Vietnam reached nearly $18 billion last year.
A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.
But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.
As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.
A recent survey by Grant Thornton, the global accounting and consulting firm, found that companies were more worried about attracting and retaining key staff in Vietnam than anywhere else in the world. (China was a close second.)
“We trained them, we educated them and then they quit,” said Akira Akashi, the chairman of Nissan Techno, a division of Nissan that designs vehicles.
The company plans to expand to 1,400 engineers in Vietnam by 2010. Beginning engineers here still earn just $200 a month, less than half the salary in China and less than a tenth of American and Japanese salaries.
Even blue-collar labor is becoming harder to find. In addition to the size of the labor force, infrastructure is also likely to be a brake on how fast China plus one can expand. Most countries in Asia, including Vietnam, have not improved transportation links as quickly as China has. Lengthy traffic jams slow down shipments and drive up costs.
Vietnam’s biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes dissent, keeps the military under tight control and changes government policies and leaders slowly.
“Communism means more stability,” Mr. Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions. At least a few American executives agree, although they never say so on the record.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and instability. A military coup in Thailand in September 2006 was briefly followed by an attempt, never completed, to impose nationalistic legislation penalizing foreign companies.
“That sent the wrong signal that we would not welcome foreign investment — this has ruined the confidence of investors locally and internationally,” finance minister Surapong Suebwonglee said in an interview in Bangkok.
Yet, like China, Vietnam does not offer complete tranquillity either. For instance, workers are becoming more vocal and staging more strikes, despite a government ban on independent unions.
Nearly 20,000 workers walked out this spring at a Nike shoe factory run by a Taiwanese contractor. The workers only went back to work when given a 10 percent raise, to $55 a month, and a larger meal subsidy.
That restive pattern is evident in the only country with enough workers to accommodate more than a fraction of the investment China sees: India, which demographers expect to surpass China in population in the next two decades.
But many companies are leery of poor roads and congested ports in India, as well as long sailing times for components that must be shipped from existing factories in China.
And even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.
That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion.
“I keep saying to our people, ‘How long will it be until we’re priced out of the market?’ ” said John Parker, Ford’s executive vice president for Asia, Pacific and Africa. “The impact of that some day is you’re no longer low-cost.”
As a long term investor, it would be worth keeping a Vietnam ETF in your portfolio at some point. I have not researched it yet or determined a good entry point.
June 18, 2008
Labor Costs Rise, and Manufacturers Look Beyond China
By KEITH BRADSHER
HANOI — Canon is no longer building or expanding factories in China, but the company is doubling its workforce at a printer factory outside Hanoi to 8,000.
Nearby, Nissan is expanding a vehicle engineering center. Hanesbrands, the underwear company based in Winston-Salem, N.C., is building two new factories here, as is the Texhong Textile Group from Shanghai.
China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.
A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.
More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.
Companies are using the China-plus-one strategy to mitigate the risks of overdependence on factories in one country.
Multinational corporations are “thinking about all the world and keeping a balance” between China and other countries, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory, which sells to Wal-Mart and Kohl’s, is building a factory in Vietnam to supplement its three factories in China.
Companies remaining in China are desperately seeking to control costs.
“We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest manufacturers of cotton and spandex fabric.
To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared to China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia.
In China, where rural villages are running low on able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour work week, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour work week that includes a full day on Saturdays.
Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs — on top of a 12 percent increase last year. New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.
When those increases are combined with a currency rising against the dollar at an annual pace of up to 10 percent, labor costs in China are now climbing at 25 percent a year or more in dollar terms.
Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.
China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.
Foreign direct investment in China has grown by a third over the last three years. By contrast, foreign direct investment has more than doubled in this period in the Philippines, quintupled in India, and soared more than eight-fold in Vietnam.
Faster rates of increase in other Asian countries partly reflect lower starting points. but investment is still growing quickly, and now it’s growing from high levels. For example, foreign investment in Vietnam reached nearly $18 billion last year.
A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.
But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.
As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.
A recent survey by Grant Thornton, the global accounting and consulting firm, found that companies were more worried about attracting and retaining key staff in Vietnam than anywhere else in the world. (China was a close second.)
“We trained them, we educated them and then they quit,” said Akira Akashi, the chairman of Nissan Techno, a division of Nissan that designs vehicles.
The company plans to expand to 1,400 engineers in Vietnam by 2010. Beginning engineers here still earn just $200 a month, less than half the salary in China and less than a tenth of American and Japanese salaries.
Even blue-collar labor is becoming harder to find. In addition to the size of the labor force, infrastructure is also likely to be a brake on how fast China plus one can expand. Most countries in Asia, including Vietnam, have not improved transportation links as quickly as China has. Lengthy traffic jams slow down shipments and drive up costs.
Vietnam’s biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes dissent, keeps the military under tight control and changes government policies and leaders slowly.
“Communism means more stability,” Mr. Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions. At least a few American executives agree, although they never say so on the record.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and instability. A military coup in Thailand in September 2006 was briefly followed by an attempt, never completed, to impose nationalistic legislation penalizing foreign companies.
“That sent the wrong signal that we would not welcome foreign investment — this has ruined the confidence of investors locally and internationally,” finance minister Surapong Suebwonglee said in an interview in Bangkok.
Yet, like China, Vietnam does not offer complete tranquillity either. For instance, workers are becoming more vocal and staging more strikes, despite a government ban on independent unions.
Nearly 20,000 workers walked out this spring at a Nike shoe factory run by a Taiwanese contractor. The workers only went back to work when given a 10 percent raise, to $55 a month, and a larger meal subsidy.
That restive pattern is evident in the only country with enough workers to accommodate more than a fraction of the investment China sees: India, which demographers expect to surpass China in population in the next two decades.
But many companies are leery of poor roads and congested ports in India, as well as long sailing times for components that must be shipped from existing factories in China.
And even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.
That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion.
“I keep saying to our people, ‘How long will it be until we’re priced out of the market?’ ” said John Parker, Ford’s executive vice president for Asia, Pacific and Africa. “The impact of that some day is you’re no longer low-cost.”
As a long term investor, it would be worth keeping a Vietnam ETF in your portfolio at some point. I have not researched it yet or determined a good entry point.
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