Oil price shock means China is at risk of blowing up
The Telegraph’s Ambrose Evans-Pritchard is one of the sharpest reporters around, and has been for some time. He describes a very interesting situation.
The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia. The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete….
Can you say “schadenfreude“?
“The monumental energy price increases will be a ‘game-changer’ for Asia,” said Stephen Jen, currency chief at Morgan Stanley. The region’s trade model is about to be “stress-tested”.
Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble. “The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back,” he said. Last week, China raised internal rail freight rates by 17pc.
BP ‘s Statistical Review says China’s use of energy per unit of gross domestic product is three times that of the US, five times Japan’s, and eight times Britain’s. China’s factories “were not built with current energy levels in mind”, said Mr Jen. The outcome will be “non-linear”. My translation: China is at risk of blowing up.
Non-linear…as in jagged, or sharp and sudden, not smooth and gradual.
Any low-tech product shipped in bulk – furniture, say, or shoes – is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. “It’s not just about labour costs any more: distance costs money,” says chief economist Jeff Rubin. Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.
North Carolina’s furniture industry is coming back from the dead as companies shut plant in China. “We’re getting hit with increases up and down the system. It’s changing the whole equation of where we produce,” said Craftsmaster Furniture.
It’s an ill wind indeed that blows no good!
Evans-Pritchard concludes with a turn of phrase that is well worth some serious contemplation, as it cuts to the real heart of the matter IMHO:
Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.
Interesting times, indeed!