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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Don Lloyd who wrote (13462)1/16/2002 9:30:54 AM
From: AC Flyer  Read Replies (3) of 74559
 
Don:

Well, I was hoping that Jay would pick up the ball on this as I suspect that he could give a better answer than me. Here's my opinion, which is as much assumption as fact.

1. Much of China's steel-making capacity was paid for with government money (assumption) and the companies that have that capacity do not reflect the cost of that capacity - i.e. capital equipment depreciation - in their steel pricing (assumption).
2. Labor in China is very cheap (fact), though I suspect that in the major industrial centers it is not quite as cheap as we might think (assumption). This reduces the cost of Chinese products at every step of the value chain, from iron ore to finished industrial fastener.
3. Labor is indirectly subsidized by factors that are peculiar to the hybrid communist/capitalist system in China. For example, I suspect that many Chinese workers still live in housing that is paid for in full or in part by the government (assumption).
4. Companies do not carry the indirect cost burden that American companies carry - e.g. payroll taxes, health insurance, OSHA compliance, etc. (assumption).

Beyond these factors, it is possible to speculate on what the Chinese government may or may not be doing. A large percentage of their currency reserves is in US dollars. I have no idea as to whether the government does anything to directly subsidize exporters that are paid in US dollars.

One more fact. My primary Chinese supplier has just purchased a very expensive state-of-the-art machine tool, manufactured in Italy, that will give them a production capability that is second to none.

Jay - opinions, please.
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