we might be seeing a short consolidation in the stock market as we are seeing a period of disinflation or deflation, check out texas crude and brent prices [92.8, 102.4], the usual gap [used to be usd20+] that exists in the past two years are narrowing and fast.
what is this narrowing in price gap telling us?
prices of crude are coming down and in a fast way either because of increase in supply [thanks to us shale oil discovery] or a decline in demand [euro zone recession] or both.
no matter what the reason is, when crude prices come down, disinflation sets in, this will initially brings down the stock market [at least for oil and mining stocks] and after stabilization of prices for a while, there could be a long rally if inflation is under control. read this blog on gold n stock market on 10 mar 2013.
commodity currencies [aud, cad, nzd] are telling the same story, they are all dropping like a stone, why? as commodities would also be in a falling trend. countries producing commodities would not reap benefits as in a rising trend like 2005-7, their gdp would undoubtedly be under stress, so are their currencies.
read blog on aud cad nzd on 6 nov 2011, the conclusions then drawn are still valid even it is over 18 months ago.
30 May 2013
29 May 2013
Dilemma China might be facing
all manufacturers must heed, wsj article worth reading.
China Is Too Large for Its Own Good
In the debate over the future of China’s growth, one factor typically animates the bulls more than any other: the country’s sheer size. One way or another, this undergirds most optimistic scenarios.
China is so big it can absorb years and years of public-works spending without waste becoming a drag. The population is so large, and still sufficiently poor, that there is seemingly infinite scope for catch-up growth.
The reality is very different. China’s mammoth proportions are likely to become a serious and growing problem as the economy enters a new phase of development— and particularly as it tries to transition from its current role as the world’s low-cost factory to a value-added manufacturing power.
The argument that China has scope for catch-up growth hinges on the fact that its average standard of living is only 17% of America’s (when measured using purchasing- power parity, with prices calibrated to U.S. levels). By contrast, Japan ended its near-10% growth phase in the mid-1970s with average standard of living at more than 70% of America’s. Some interpret this to mean that for the foreseeable future China can achieve rapid growth simply by
importing technologies to boost the productivity of its cheap labor force as it converges on America’s standard of living.
This misses a key point, however. China can physically raise production, but that will sustain growth only if China can sell the extra products. And if it can’t sell them abroad, then it can grow only by selling more at home.
Small countries can go on capturing shares in big world markets until their income per head catches up. Big countries can’t, unless they make world markets commensurately bigger. Either their share of world consumption must grow or their share of world production will stop growing. China already dominates both production and capacity at the low-value-added assembly end of manufacturing. China’s huge size means that to maintain stellar growth rates, the economy needs to move up the value-added chain fast and grab more export market share. But to generate domestic consumption, wages need to rise— undermining the competitive edge
that would allow China to grab more export market share.
A seemingly inexhaustible supply of cheap labor has been one of the key ingredients of China’s miraculous growth, but now China could be reaching a “Lewis turning point.”
Described by 20th-century economist Arthur Lewis, this is the point at which excess labor in
low-productivity industries has been fully absorbed into the highproductivity industries. At this point wages begin to rise as competition for workers becomes fiercer, and corporate profits are squeezed. In January the International Monetary Fund released a paper arguing that China will reach the Lewis turning point between 2020 and 2025. But other evidence suggests we’re already there. Wages have been rising for years now, and profits in 2012 fell sharply—both telltale signs.
Here again China’s size works against it. The rise in productivity and wages is a great boon for
workers in high-productivity jobs. But many of China’s workers don’t have the higher skills necessary for the economy to move up the value-added chain. And the squeeze on corporate profits engendered by the Lewis turning point will make it harder for companies to invest in boosting the productivity of today’s low-skilled workers.
There’s also the question of how productive today’s high-productivity workers really are. On the plane back from Shanghai recently, I sat next to an Italian gentleman who produces valves. He manufactures low-quality ones in China and high-quality ones in Italy, where he uses much more complicated machinery. I asked him why he doesn’t import the machinery to China and produce higher-quality valves more cheaply. He responded that a Chinese competitor of his bought two machines from him with that idea in mind but had to shut both down within six months because he lacked the qualified workers to operate them.
China may still have abundant rural labor supply, but it has a shortage of the skilled labor supply it now needs. Labor shortage is good news for consumer incomes (at least for those consumers whose labor warrants the higher wages) but only if consumer spending rises at the same or faster pace than consumer incomes, and productivity growth is the same as or exceeds wage growth. If not, profits will be decimated, which will then feed into lower consumer incomes. There are some signs that this is happening in China, where the household consumption rate continued to fall in 2012.
The world isn’t big enough for China to rise up the value-added chain without generating domestic consumer spending. Policy makers in Beijing seem to acknowledge this, but creating genuinely independent Chinese consumers will be difficult work.
Ms. Choyleva is a director at
Lombard Street Research.
China Is Too Large for Its Own Good
In the debate over the future of China’s growth, one factor typically animates the bulls more than any other: the country’s sheer size. One way or another, this undergirds most optimistic scenarios.
China is so big it can absorb years and years of public-works spending without waste becoming a drag. The population is so large, and still sufficiently poor, that there is seemingly infinite scope for catch-up growth.
The reality is very different. China’s mammoth proportions are likely to become a serious and growing problem as the economy enters a new phase of development— and particularly as it tries to transition from its current role as the world’s low-cost factory to a value-added manufacturing power.
The argument that China has scope for catch-up growth hinges on the fact that its average standard of living is only 17% of America’s (when measured using purchasing- power parity, with prices calibrated to U.S. levels). By contrast, Japan ended its near-10% growth phase in the mid-1970s with average standard of living at more than 70% of America’s. Some interpret this to mean that for the foreseeable future China can achieve rapid growth simply by
importing technologies to boost the productivity of its cheap labor force as it converges on America’s standard of living.
This misses a key point, however. China can physically raise production, but that will sustain growth only if China can sell the extra products. And if it can’t sell them abroad, then it can grow only by selling more at home.
Small countries can go on capturing shares in big world markets until their income per head catches up. Big countries can’t, unless they make world markets commensurately bigger. Either their share of world consumption must grow or their share of world production will stop growing. China already dominates both production and capacity at the low-value-added assembly end of manufacturing. China’s huge size means that to maintain stellar growth rates, the economy needs to move up the value-added chain fast and grab more export market share. But to generate domestic consumption, wages need to rise— undermining the competitive edge
that would allow China to grab more export market share.
A seemingly inexhaustible supply of cheap labor has been one of the key ingredients of China’s miraculous growth, but now China could be reaching a “Lewis turning point.”
Described by 20th-century economist Arthur Lewis, this is the point at which excess labor in
low-productivity industries has been fully absorbed into the highproductivity industries. At this point wages begin to rise as competition for workers becomes fiercer, and corporate profits are squeezed. In January the International Monetary Fund released a paper arguing that China will reach the Lewis turning point between 2020 and 2025. But other evidence suggests we’re already there. Wages have been rising for years now, and profits in 2012 fell sharply—both telltale signs.
Here again China’s size works against it. The rise in productivity and wages is a great boon for
workers in high-productivity jobs. But many of China’s workers don’t have the higher skills necessary for the economy to move up the value-added chain. And the squeeze on corporate profits engendered by the Lewis turning point will make it harder for companies to invest in boosting the productivity of today’s low-skilled workers.
There’s also the question of how productive today’s high-productivity workers really are. On the plane back from Shanghai recently, I sat next to an Italian gentleman who produces valves. He manufactures low-quality ones in China and high-quality ones in Italy, where he uses much more complicated machinery. I asked him why he doesn’t import the machinery to China and produce higher-quality valves more cheaply. He responded that a Chinese competitor of his bought two machines from him with that idea in mind but had to shut both down within six months because he lacked the qualified workers to operate them.
China may still have abundant rural labor supply, but it has a shortage of the skilled labor supply it now needs. Labor shortage is good news for consumer incomes (at least for those consumers whose labor warrants the higher wages) but only if consumer spending rises at the same or faster pace than consumer incomes, and productivity growth is the same as or exceeds wage growth. If not, profits will be decimated, which will then feed into lower consumer incomes. There are some signs that this is happening in China, where the household consumption rate continued to fall in 2012.
The world isn’t big enough for China to rise up the value-added chain without generating domestic consumer spending. Policy makers in Beijing seem to acknowledge this, but creating genuinely independent Chinese consumers will be difficult work.
Ms. Choyleva is a director at
Lombard Street Research.
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