China’s Affect on the Market
This year’s recalls out of China that include tainted wheat gluten, toothpaste and children’s toys, although soothed by Mattel’s mea culpa, ultimately is impacting the cost of US consumer goods. Unfortunately for retailers, the upcoming holiday inventory originating in China has already been ordered and shipped and will be presented to leery consumers. It will be too late to find alternatives and the labor costs of dealing with recalled items will have a direct affect on the cost of sales.
Additionally, this continuous stream of recalls has impacted not only the prized Chinese ego but its bottom line as well. On June 1, 2007, the Chinese government issued a levy of 5-15% on most exports from China which will raise consumer costs in the US 7-18% when considering increased import taxes and proportionate profit margins by retailers.
On top of this economic impact, the Chinese currency was recently revalued due to pressure from the West and the World Trade Organization. The Chinese Yuen, which has traditionally been pegged to the US dollar is now trading at 7.5 RMB to 1 USD, is down from over 8 last year. This revaluation increases labor costs which directly impacts the cost of imported consumer goods. The US buyer can expect to see overall increases at the retail outlets of 10-20% on products from China.
The Chinese spending habits are also shifting sharply to reflect an increase in spending and a decrease in saving. Despite restricted internet access and news, the Chinese youth is becoming increasingly westernized. The one child system in China has created a generation of families that have only one focus; the sacred, single child. Children are driving the spending habits and significantly influencing the Chinese culture. Their desire for technology, imported and luxury goods is creating a greater spending trend. They are also buying cars and consuming oil at historic rates which is driving fuel cost globally.
The Chinese government has been plagued with massive infrastructure problems and severe pollution of both the water and the air. The Government is implementing many alternative energy projects, massive infrastructure development and building a city the size of New York every year. The Beijing Olympics in China will only increase government and consumer spending in China. The result could be less savings in the Chinese banking system and a more internal focus for government spending. Consequently, US Treasury bills and bonds could see significant redemption if they are not supported by continued Chinese investment.
Here in the US, the dollar is currently trading at historic lows with no certain relief in the future and an ongoing war raging on in Iraq. Weather forecasters are predicting a long, cold, wet winter which will drive up oil prices. Higher gas prices will ultimately lead to higher grocery costs and general inflation which could force the Fed to increase interest rates early next year. The subprime housing market situation should significantly restrict access to credit and by the time the holiday season comes. Shoppers will have less to spend and less they can afford. If post holiday market reports are non-favorable the end of the year could see a sharp sell-off.
Former Fed Chairman, Alan Greenspan, is forecasting a possible recession in the US economy despite the current strength on Wall Street. Perhaps Mr. Greenspan has taken many of these factors into consideration and is quite correct in his prediction. On the bright side, a weak dollar should stimulate growth and tourism in the US and the pending election year will see increased spending in the media. Unfortunately, advertising space for non-political advertisers will be expensive and hard to come by.
References
http://www.purchaseusa.biz/China issues import and export provisional tax.htm
Global Envision
http://www.globalenvision.org/library/1/1691/
Economist David Hale, lecturing at University of Colorado in Denver, August 2007
Bloomberg
http://www.bloomberg.com/markets/index.html?Intro=intro_markets
AOL Money and Finance