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Tuesday, January 16, 2007

The China Effect on European Import Prices is Waning

In October 2006, the world's biggest container ship, the Emma Maersk, owned by A.P. Moeller Maersk of Denamrk, docked for the first time in the UK port of Felixtowe loaded with nearly 45,000 tons of Chinese-made goods including MP3 players, computers, Christmas trees and crackers.

The Emma Maersk, which is 400 metres long (1,300 ft), 56 metres wide and 60 metres tall, and dubbed the SS Santa, unloaded more than 3,000 containers for supermarkets and stores before heading to mainland Europe.

To day, the UK Office of National Statistics reported that annual UK consumer prices rose 3% in December. The all items retail prices index (RPI), including mortgage payments, rose by 4.4 per cent, up from 3.9 per cent in November.

As in Ireland, many UK consumer goods have actually fallen over the past decade because of imports from China counterbalancing high rises in service inflation..

While transport costs, were a big factor in the rise of UK consumer prices, it is also thought a waning in the Chinese impact of falling manufactured goods prices, is having an impact.

Last autumn, Governor of the Bank of England Mervyn King said in a speech:

Over the past decade the integration of China, India and other emerging markets in Asia into the world trading system has lowered the prices of clothes, electrical goods and other items that we import from them. The terms on which we trade with the rest of the world improved. That provided a boost to real disposable incomes and so to consumer spending. But the rapid growth of China and India also meant sharp increases in the prices of many commodities, such as copper, aluminium, iron ore and, particularly important, oil. In that sense the rises in oil prices over the past two years are very different from the oil price “shocks” of the 1970s. They reflect rapid growth in the demand for oil – faster than the growth of capacity – rather than an OPEC-inspired contraction of supply. What we have seen is not so much an “oil shock” but a consequence of the rise of China.

The lower prices for many consumer goods and the higher cost of oil are both the result of globalisation. Having benefited from the former we are now experiencing the latter. As a result, our import prices are no longer falling as rapidly as they were, and, indeed, over the past year even the prices of non-oil imports have risen. With the additional impact of higher oil prices, real disposable incomes are rising more slowly, and the long awaited rebalancing of the economy away from consumer spending to business investment and net exports is underway.

In the US, Wal-Mart Stores Inc., the world's biggest retailer, imports about $18 billion annually. The imports are evidence of how China effectively exports deflation to the rest of the world.

The Wall Street Journal reported in early January that the Chinese currency's rising value has started to pinch an increasing number of businesses here, eroding already thin profit margins, forcing them to reduce expenses and sometimes costing them business.

The Journal said that tightly controlled Chinese yuan has crept up 6% since July 2005, when the government loosened its link to the US dollar. Its gains against the dollar are modest compared with the sharper run-ups of other currencies, such as the euro. But the pace of the upswing has been unusually fast for China, where until recently companies had almost no experience with currency fluctuations against the dollar.

The stronger yuan is reducing the profit Zhenhua Port Machinery Co. earns on its big shipping-container cranes when they are sold in dollars. To cushion the blow, Zhenhua is raising prices, changing sales terms and looking for efficiencies in its manufacturing processes. The yuan "revaluation obviously hit us," says Wang Jue, board secretary of the Shanghai company.

Zhejiang Dongyang Haisen Trading Co., a maker of beverage containers in eastern China, says the yuan move has entirely erased its 2% or 3% profit margin on basic products. For now, the company is offering a newer, pricier line of products for export orders, says sales manager Zhang Shengquan. "What we hope is that the appreciation [of the yuan] could slow down a bit," Mr. Zhang says.

As the yuan continues to edge up, so will China's export prices, says Edward Leung, chief economist of the Hong Kong Trade Development Council, a government-funded industry group. Manufacturing costs in China already face rising labor and materials expenses, he says. Further gains by the yuan will leave exporters with little choice but to charge more.

The Journal reports that US companies that have extensive operations in China are also feeling the effects. In a regulatory filing, Measurement Specialties Inc., an instrument maker based in Hampton, Va., said in November that the yuan's rise has "resulted in lower margins since a large portion of our products is manufactured in our China facility."

In neighbouring Asian countries, competition between Japanese and South Korean flat TV manufacturers is also benefiting western consumers.

The message is that interest rates may have to be increased to a higher rate for a more sustained period, if the positive impact of falling prices of imports from Asia wanes.

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