Monday, October 17, 2005

The Word from China

XIANGHE, China -- U.S. Treasury Secretary John Snow struck a surprisingly conciliatory tone after talks with China's top economic leaders, saying he has faith that the Chinese will reform their financial system.

Mr. Snow said he came away from the weekend meetings convinced that China is clearly "preparing the way" for a more modern financial system and a more flexible exchange rate for its currency, something Washington has pressed for.

"It's real. It's happening," Mr. Snow said. He added that he was "heartened" by the many changes Beijing was putting in place.—Wall Street Journal

Like he has a choice!

U.S. commercial interests and the Chinese economy are so intertwined it’s hard to figure what kind of leverage Mr. Snow has pressing China for anything more than extra duck sauce on his Kung Pao Chicken at the state dinner.

A friend who runs a small consumer products business just returned from two weeks in that country, touring the plants where almost 100% of his company’s products are made and also visiting the buyers for the U.S. retailers which sell almost 100% of those products.

He thinks the Yuan will be allowed to appreciate over time, eventually, but what worries him more is making sure he’s getting the right products made and shipped in time for the Christmas selling season…and lining up next year’s production.

And any notion that the Chinese somehow might knuckle-under to threats from Secretary Snow and change the way they conduct their economic ‘long march’ to prosperity is not part of that equation.

As for the changes he has witnessed over a decade of trips to China, the most profound is the immense wealth creation accruing to the men who bought the state-owned businesses that now churn out his product, how the plants have grown in size and modernized their production techniques, and the trickle-down impact of all this on the workers themselves:

“Five years ago I’d walk through the plant with the owner, and the women cowered at their machines. Now they seem happy. I can’t explain it.”

I can: it’s called money.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Tahoe Kid said...

The Chinese Model: Increased economic freedom and limited political freedom. The Russian Model: Increased political freedom and limited economic freedom. No wonder the Chinese women smile more. Political freedom when you lack the ability to properly support/feed yourself and your family doesn't mean much.

Achal said...

this kind of tire-kicking info is really, really useful.


DreamsUnlimited said...

I was born and brought up in the world's largest democracy and free country. I still remember the words a poet wrote in a local language in India that loosely translates like this:

"Death is also like Marriage
In a land that is free"

I have only grown to apprecaite this more and more in the world's oldest democracy and free country.

Now, are we saying money is equal to or more valuable than freedom???

A. Saxena said...


I think Jeff's point is simply that money matters quite a bit more than many like to think. We can editorialize all we want about the lack of freedoms in China. However, with our heated homes, cell phones, cars and other amenities that we take for granted we are quite out of tune with the aspirations of the average Chinese worker.

Consequently, there is probably no revolution coming in China any time soon that will overthrow the Communist Party. If anything, more rural Chinese are clamoring for a piece of the pie.

I believe this was the case in India not too long ago, where the ruling party lost in the elections in spite of the best period of economic prosperity. It wasn't that the rural population was bemoaning the loss of the socialist policies due to liberalization; they were just watching the urban prosperity on their TV's and wanted a piece of the action.


whydibuy said...

Mfg. in this country is toast. This from an ex mfg. mgr ( me ). Marc Faber said that in '90 China produced almost no engineers. Fast forward to '00, China graduated over 100k eng. of various kinds. These folks are now putting out world class products. For ex, we got a free micrometer with the purchase of 100.00 worth of industrial supplies. Yeah, right, what kind of piece of junk is this? So I got out the ole gage blocks and tested it at different points. Holy sh*t, this tool is darned accurate. I'd have no qualms about using it. If they can mfg a precision measuring instrument like a micrometer and retail it for 7.00, U.S. mfg is toast.

whydibuy said...

And another thing, GM, F and these autoworkers should not expect the living to get any easier in the future. There is a Chinese automaker that buffett has a stake in that'll be ready to start exporting by '07. Word is that its a pretty good vehicle and a knockoff of a GM product.

Sam S. Park said...

Mr. Snow probably came out and spoke about this because Good Ol' Mr. Chuck Schumer is probably barking about China's slow progress to revalue the yuan. Schumer had previously promoted his Schumer-Graham bill, which would raise tariffs on Chinese imports by 27.5%!!! The senators are, for lack of a better word, pissed at China. Obviously Snow and Greenspan oppose this bill because if this bill passed, Wal-Mart shoppers will suffer, inflation would immediately rise, and China who has been a big buyer of Treasuries will retaliate. I wrote about Schumer's bill several months ago for RW Wentworth.

There's alot more to this story than Snow just coming out to say that this reform is happening. Another problem that congress finds upsetting is the lack of intellectual property laws in China. There's really too much going on for me to comment here.

Aaron Koral said...

Jeff: I think China wants to let the yuan appreciate to cool any potential inflationary pressures from domestic economic growth in goods and services.

If the US dollar depreciates against the yuan and other Asian currencies, that should, in theory, drive US import prices higher.

If import prices move higher based on an appreciating yuan and a depreciating dollar, that should bring about inflation, which should spur the Fed to continue to raise interest rates so as to curb inflationary expectations.

So what's the end result? My guess is that you're probably looking at higher yields on long-term (i.e., 10 and 30 year) US Treasuries if Greenspan and Snow get their way (I highly doubt that will happen, though, but I could be wrong).

I guess money really does make the world go 'round!

Sam S. Park said...

It's much more complicated than that. US senators want China to appreciate the yuan, because people blame China for our international trade deficits. Gradually readjusting the yuan would help somewhat, but it would not fix our deficits.

China does not want to appreciate the yuan. They are an export-led country. And keeping their products seem cheap (by keeping their currency artificially low) has kept the demand for their products high. Think of it this way, "whydibuy" said that his little gadget costs 7 bucks, and a smart consumer would choose the cheaper product that seems to do well compared to its competitors' more expensive product. There are reasons why these Chinese gadgets remain inexpensive for us besides their cheap labor.

Another reason China had fixed the yuan to the dollar has probably something to do with the carry-trade hedging opportunities for Chinese fiscal authorities. But let's keep this conspiracy theory for Washington to work out.