BIG PICTURE: China Has Become The World's Factory Floor
28 Jan 12:11
By John McAuley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--A recovery in U.S. factory activity is being blunted by
the mass shift in global manufacturing to China.
In fact, the explosion of China's manufacturing sector contributed to the
downturn in manufacturing, that slowed ahead of the rest the U.S. economy and
it has prolonged that slump even after the non-manufacturing sectors have
already begun to recover.
"China has become the manufacturing center of the world and has gained
market prominence in the production of goods not usually thought about in
terms of Chinese production," said Anirvan Banerji, research director at the
Economic Cycle Research Institute.
Indeed, the movement of manufacturing to China hasn't only been from
traditionally high-cost economies such as the U.S., but also from low-wage
cost centers such as Mexico. Many U.S. multinationals took the first big bets
on manufacturing in China, but since China's accession to the World Trade
Organization in 2001, smaller firms have followed in droves. The result has
been a boom in foreign direct investment, totaling $52.7 billion last year.
Having made up only a paltry amount of the U.S. trade deficit in 1985, China
now accounts for just under 21%, while Japan's share of that deficit has
slumped to roughly 15% from 62.3% in 1991.
On the global manufacturing stage, China is perhaps mostly renowned for
producing inexpensive toys and other consumer good. It remains a dynamic force
in this area. But China has also made steady inroads into the markets for more
expensive goods, in particular in the technology field.
Thanks to its low cost labor force, China, which accounted for just 4% of the
world economy last year but 16% of global growth, has been steadily attracting
technology companies to base manufacturing plants in China. Banerji noted that
Taiwanese producers have rushed to dothis; Japanese manufacturers are also
shifting some production to China.
China was especially well positioned to take advantage of its low cost labor
force and this is set to continue to hand China a competitive advantage at a
time when much of the rest of the world is barely chugging along.
According to Jason Rotenberg, an analyst at Bridgewater Associates in
Westport Conn., China's per-capita income is currently only about 2.5% of that
in the U.S. "The gap in labor costs in China and the developed world is huge
and is just now starting to narrow - and still at a very slow pace," he said.
There are also other forces at work that have helped provide a favorable
environment for Chinese manufacturing. For instance, ECRI's Banerji noted that
"an unintended consequence" of the rate-cutting campaign of the Federal Reserve
and others handed a low-wage cost producer like China special pricing
advantages in a low inflation environment.
Indeed, many economists would argue that a lack of so-called pricing power in
some developed economies - a result of low inflation - is weighing on global
growth.
The combination of foreign direct investment by global manufacturers and -
more important - the application of technology developed abroad, with China's
abundant and low-cost labor force was a potent mixture. China insists on
technology transfer as the price of admission by foreign investors and the
country has proved keen to learn.
In this context, the results haven't been surprising. China exported $113.5
billion of merchandise to the U.S. in the first 11 months of 2002, accounting
for 10.7% of total U.S. imports, up from 9.0% in the same period of 2001.
Moreover, the momentum has gathered and spread.
"Whole segments of U.S. manufacturing are moving to China,' said Bill
Primosch, director of international business policy at the National Association
of Manufacturers in Washington. "Metal bending and tool and die manufacturers
are moving to China, inmany cases following other companies like auto parts
makers that they supply."
Of course the NAM is concerned with actual and perceived differences in U.S.
and Chinese competition. Indeed, many believe that the competition is unfair
and that China's undervalued exchange rate gives it an advantage and allow it,
in effect, to "export deflation," to use the phrase coined by Haruhiko Kuroda,
Japan's former vice finance minister for international affairs.
Kuroda argues that since the yuan, the Chinese currency isn't fully
convertible, but instead pegged to the dollar, at a time when the greenback is
depreciating, the prices of Chinese exports are falling in terms of other
currencies.
Though Beijing says the yuan exchange rate is determined through a managed
float, in reality the rate is almost entirely government-controlled, and it
gyrates in a narrow band with a central point of around 8.28 yuan against the
dollar.
But not all regional observers agree with Kuroda's critique. "Interestingly,
the hype that we hear on China exporting deflation and hollowing out the
region's manufacturing sector is overblown," noted Sailesh Jha of the
Development Bank of Singapore, in a quarterly outlook for non-Japan Asia.
Indeed, Jha emphasized that "China is one large processing center for low
value added consumer products such as garments, toys, and leather goods."
Moreover, he says that "the evidence suggests that in most high value added
goods production, China still runs a trade deficit."
Jha's conclusion may damn with faint praise. But the fact of the matter
remains that a lot of the world's manufacturing is being syphoned away by
low-cost Chinese manufacturers.
-By John McAuley, Dow Jones Newswire, 201-938-4425; john.mcauley@dowjones.com
(END) Dow Jones Newswires
01-28-03 1211ET |
