Richard Brubaker runs an excellent blog called "All Roads Lead to China". He recently posted a great article on the China trade surplus and some interesting figures on the western trade imbalance.
Recently the Chinese government made changes in the VAT rebate program in order to slow exports some in the future. They did this primarily to keep exports somewhat in line with the ability to move the freight, as well as to (somewhat) slow the appreciation gap in real value of the Chinese Yuan vs it's fixed price (8 to 1) against the dollar.
In observing the last several years of Chinese export growth it seems clear that China is showing stress fractures in its infrastructure. These are manifesting themselves in several ways.
1. Booming container and air traffic stressing the road and rail infrastructure. The 3PL business in China continues to grow strongly, but if the roads and rails as well as safety laws aren't there, volume does not help this mix. Port infrastructure is also under stress with volumes growing in Shanghai, Hong Kong and other Chinese ports.
2. Appreciation gap of the Chinese currency - eventually this gap is going to be accounted for. Margin impact on imported goods will diminish over time. This is worth watching closely.
3. Quality control issues with multiple products, especially in food and basic ingredients.
4. Increased safety issues both in plants as well as in movement of goods. Human labor in China is a commodity. Over time, labor laws will continue to impact Chinese manufacturing.
Rich rightly points out in his article that the American Press will make the fear factor about buying from China a big deal as the 2008 elections approach and future investment in China may be more cautious in the near term. When results become less certain, western companies will be more careful with their investment for both economic and political reasons.
Stress fractures in China may strengthen India. India is Asia's 4th largest economy. India is the second beneficiary of globalization. India has a similar low labor cost basis to China, and a very technically oriented work force. India's government also realizes that in order to expand it's economy, it needs to increase exports. With government goals of increasing exports by 10% in 2007, India is a serious competitor to China for outsourcing. India's exports grew 18.07 percent in May 2007 alone. India is also closer to European markets than China.
Multi-national firms like General Electric are not just off shoring, but investing heavily in their own operations in India. GE has 13,000 employees in India today. India's inland infrastructure is immature, but improving. In the next 10 years, I bet that a shift may occur that puts India on a more equal footing with China as the worlds sourcing location.
Eric
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