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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: ild who wrote (61102)	5/16/2006 12:22:06 PM
From: russwinter	Read Replies (1) of 110194

Xie absolutely nails it, nobody else get this like he (and me) does! He calls it "normalizing" China's true production costs. The term I've used is paying for negative externalities, such as exposing population to death, disease and poor health. That's not free. Third, China is normalizing its production cost. Manufacturing production has relocated to China on a massive scale in the past five years due to China’s cheap labor and lax enforcement of environmental standards. While the low labor-cost advantage is well understood, the lax environmental rules and their enforcement are not well understood and may have become more important than labor costs in attracting production relocation in the past three years. The world has dumped its pollution in China in the past five years. According to China’s EPA, China’s pollution is 12 times the world average per unit of GDP. The emission of sulfur dioxide is 22.5 mn tons compared to the maximum carrying capacity of 12 for the country. Two-fifths of the seven major river basins are severely polluted. 90% of the rivers running through cities suffer from severe pollution problems. 300 million rural residents have no access to purified water. One-third of China’s territory suffers from the effects of acid rain. Two-thirds of the population suffers from poor air quality. China’s environmental catastrophe is a poorly understood factor in the global disinflationary trend. If the relocated factories had to subscribe to the same environmental standards as in the OECD countries, goods made in China may not have been so cheap. My guesstimate is that the lesser costs for pollution have been more important than cheap labor in the disinflationary pressure from China. China is waking up to the need to normalize pollution costs. Guangdong Province may close thousands of businesses that do not meet environmental regulations. The NDRC just issued tightening instructions on the carbide-based PVC industry that creates serious pollution. China’s policies to increase wages (see ‘Raising Wages, not Currency’, 12 May 2006) will increase China’s export price substantially, by 20-30% for industries like knitwear. The normalization of pollution standards could do the same for many chemical products. Normalization of China’s production is a major source of cyclical inflation. Part of the unsustainable disinflation between 2002-05 has to be regurgitated.

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