yes it will. to the extent that higher interest rates cause a slowdown in the US and global economies, demand for goods from China is reduced. China is dead without exports.
oh and don't the chinese know it...
they will do whatever it takes to keep u.s. demand robust
my personal feeling is that even a full basis point hike by the fed would not be enough to slow down the china juggernaut...unless the idea is to kill the nascent US recovery to take the steam out of china...is that what you are suggesting?
talk about cutting off your nose to spite your face.
what will slow down china will be the same thing that slowed down the US in the late nineties....
overcapacity
which would lead to job loss
and i think the chinese will do whatever it takes to avoid that (with the current urbanization program ongoing, an urbanized society depends on a stable and growing middle class.... just imagine the political scenario with millions of unemployed chinese, that will be avoided at all costs)
the industrialization of china is inexorably tied to the good fortunes of the US, and will do whatever it takes to maintain trade (and despite any rhetoric you hear from washington and beijiing, there *will* continue to be a trade imbalance, the best we can hope for is the asymmetrical nature of the trade partnership doesn't doom it in the long term...i think the chinese understand concept of killing the goose that lays the golden egg (the u.s. consumer) but in the long run, it may happen....the chinese will continue to export deflation(secondary)....
they're not like the japanese, where there was innovation and quality afforded them the luxury of some pricing pressure ....and yet even with that, overcapacity and malinvestment sent japan into deflation.
china doesn't have that luxury, china is basically mammoth sweat shop.
which leads us back to china's demand for resources
story.news.yahoo.com
Chinese Price Impact Is Double-Edge Sword
Wed Dec 10, 9:57 AM ET
By Jed Graham
The shift of manufacturing to low-wage locales like China has led to falling durable goods prices for years, boosting consumer purchasing power.
That's still the case, but there's a new fly in the ointment. China's rip-roaring economy, which is being fueled both by exports and a growing consumer culture, has created unexpected demand for basic resources and threatens to put a strain on the supplies of metals, oil and even shipping.
Metals prices have surged this year, while oil has stayed stubbornly high and shipping rates have doubled. All of a sudden, the developing world isn't just the source of goods deflation, but also the major factor behind commodities price inflation.
That shouldn't be a big worry for consumers yet. With so much slack in the job market, most economists see little chance that higher commodities prices will have a noticeable impact on consumer prices over the next year. But those higher material costs are another factor pressuring the profits of U.S. producers already struggling to compete with low-priced imports.
Unable to pass through higher commodity prices to customers, companies have had to squeeze their cost structure, says Daniel Meckstroth, chief economist of the Manufacturers Alliance/MAPI.
"It helps explain why (factory) employment has continued to drop as the economy has rebounded, because there's so much pressure to cut costs," he said.
Bigger Than Post-WWII
The excitement over the economic opportunity created by China's demand for resources has the feel of the technology boom in 1999, notes Andy Xie, Morgan Stanley's chief Asia Pacific economist.
China's industrial boom will have "a greater impact on resource demand than the reconstruction of Europe and Japan after World War II," Xie wrote. "Make no mistake, these rocks are hot. Nickel prices are up by 72% year to date, lead by 54% and copper and tin by 32%."
China's oil imports are on pace to rise at least 25% this year, while copper imports are up more than 20%. Largely due to China's demand for the imported materials it churns into finished consumer goods, the Baltic Dry Index, a measure of freight rates for commodities, has more than doubled in the past year.
Is all this evidence that the days of low inflation are numbered?
Probably not, says Anirvan Banerji, research director at the Economic Cycle Research Institute.
"Even though there's been an eye-catching jump in industrial commodity prices," those materials are just a small part of the overall cost of production, Banerji said.
The cost of labor is a much bigger factor. Labor costs have been falling because of productivity gains and the shift of production to low-wage countries like China, he says.
Less than 10% of the rise in material prices makes it into finished producer prices, says John Mothersole, a commodities specialist at Global Insight.
Only half of that rise flows through to consumer prices, he says.
The rise in commodity prices is closely tied to the rebound in global industrial production. While production in China has been rising much faster than anywhere else, output is recovering in the U.S., Europe and Japan, too.
"Commodity prices help signal turning points in the business cycle," Mothersole said. "For the rise in commodity prices to break out into general inflation, you'd have to have slower productivity growth."
That and a stronger job market would lead to rising unit labor costs, but Mothersole doesn't anticipate the kind of labor market strength that would produce those cost pressures.
The rise in commodity prices this year isn't out of line with past cycles, except that it was so slow to materialize, Mothersole says.
Because the 2001 downturn saw weakness around the globe, this commodity price downcycle was particularly severe, he says. Most material prices are only back to where they were in 2000 and remain well below their levels before the 1997 Asian financial crisis.
The downturn in commodity prices coincided with an appreciating dollar, which made basic materials less expensive in dollar terms.
Now the dollar's decline is contributing to the rebound in material prices. But the main driver of commodity prices is supply and demand.
The rebound in prices is evidence that demand for industrial commodities has risen much more than suppliers had predicted in setting their output levels, Banerji says.
"Industrial production has ramped up well beyond expectations," he said. "At the margin, that has created a kind of shortage, which drives up prices dramatically."
Meckstroth of the Manufacturers Alliance sees higher commodity prices as a short-term issue that will be corrected within six months or a year.
"A lot of the problem with commodity prices is that capacity was shut down," Meckstroth said.
But as prices go up, producers are beginning to bring underutilized capacity back online, he says.
Meckstroth agrees with most economists that inflation will fall in 2004 and that goods prices will be flat or even continue to decline.
The wild card is just how strong and widespread the global recovery becomes. Right now, domestic demand is still weak in Europe and Japan.
But strength across the globe could quickly alter the low inflation outlook, Banerji says.
"In a synchronous global expansion, global capacity is soaked up very rapidly," he said.
The last time that happened in 1999 and 2000, the Federal Reserve (news - web sites) felt compelled to go on defense against inflation, he notes. |
