......inflation as China prices rise
- From: cnw <cnw@xxxxxxx>
- Date: Thu, 31 Aug 2006 10:16:11 +0800
Western countries wary of inflation as China prices rise
The cost of Chinese goods has climbed each of the past four months, and the
increases will be passed on to consumers at some point
NY TIMES SERVICE , HONG KONG
Sunday, Aug 27, 2006,Page 12
Anthony Temple, Paddington bear rights owner, says China is no longer a
``bottomless pit of cheap products.''
PHOTO: NY TIMES NEWS SERVICE
During 20 years in the toy business, Anthony Temple has reveled in the bounty of
cheap stuffed animals, coffe mugs and figurines on sale from China. But, this
year, his buying trip for his London-based company, Rainbow Designs, resulted in
a rude awakening.
Traveling through the Pearl River delta north of Hong Kong, Temple found that
cost increases -- for raw materials, but above all for labor -- dominated every
discussion he had with suppliers.
Far from being keen to underbid each other, Chinese companies talked so
consistently about marking up their prices 5 percent to 10 percent that Temple,
whose company owns the British distribution rights to cuddly creatures like
Paddington Bear and Jemima Puddle-Duck, became convinced that these were not
simply negotiating tactics.
"When I went over there, I was under the belief that China is a bottomless pit
of cheap products," Temple said.
"When I left, I was not," he said.
As the Chinese economy races forward, signs are multiplying that the Asian giant
is beginning to slow its exports of something dear to the hearts of many
consumers in developed countries: ever cheaper products.
For at least a decade, China has provided a boost for inflation-fighting central
banks in Europe and the US by consistently cutting prices on a wide variety of
goods, helping counterbalance the upward drift of overall consumer price levels.
US Federal Reserve Chairman Ben Bernanke opened an annual conference of central
bankers in Jackson Hole, Wyoming, on Friday with a speech that noted how the
emergence of China as an export powerhouse has altered the world economy in less
than 30 years.
China's role in global disinflation -- as the phenomenon is known to economists
and central bankers -- is not going to disappear. But a few recent numbers,
along with anecdotal evidence, suggest that China's contribution to low prices
around the world may be ebbing.
The European Central Bank promised to step up research into what has been called
the "China effect."
Top officials at the US Federal Reserve have also begun speaking out about it.
And the debate over how much China has contributed to taming global inflation is
a central topic at the annual Jackson Hole gathering of the world's leading
central bankers and academic economists.
In the US, data shows that Chinese import prices, which have fallen since data
collection began in 2003, are leveling off, as are prices from other low-cost
emerging markets.
The price of Chinese goods has leapt upward in the last four months, according
to a purchasing managers' survey performed by London-based NTC Research. The
survey's index showed a level below 50 -- a level indicating stable prices -- in
March but it now stands at 56, a steep increase by the standards of a survey
that usually moves in fractional increments.
China's galloping economy has been sending ripples through the global economy
for years as demand has raised prices for critical commodities such as oil and
copper there. China's purchases of US Treasury securities have also helped keep
interest rates low.
And not all economists buy the overall notion that Chinese prices will soon pump
up inflation rates in the industrialized world and force central bankers to
press harder on the brakes. Skeptics about the "China effect" tend to focus on
the ability of China and its customers to adapt.
As Chinese costs increase, foreign investors can set up shop in places like
India and Bangladesh, which lag behind China as low-cost manufacturing centers.
Other companies will press into China's vast interior to escape rising labor
costs on the coast.
"The global labor arbitrage is alive and well," said Stephen Roach, chief
economist at Morgan Stanley.
"It still pays very much to relocate production and employment to China to keep
your labor costs down," he said.
The cheap clothes and toys that consumers around the world have purchased with
seeming abandon have tempered prices, even depressing them over the years. Now,
as Chinese makers move to increase their prices in response to higher costs,
some central bankers worry that this global salve will disappear.
"Even in China, with its growing manufacturing base and large pool of labor,
some indicators are showing upward pressures on export prices," Mervyn King, the
governor of the Bank of England, said in a recent speech.
"And, in turn, that is raising our import prices, over and above the increases
resulting from higher energy costs," he said.
The prospect of higher prices for finished consumer goods has become an
obsession of sorts in the supply-chain business, according to interviews with
retailers, importers, independent consultants and trade associations in Europe
and the US.
"We may well be reaching a situation where prices of both commodities and
manufactured goods will go up," said Kenneth Rogoff, a former chief economist of
the International Monetary Fund.
"That's not pleasant at all," he said.
China's natural development has brought it to this point, economists said. Cheap
labor and easy access to a first-class port in Hong Kong allowed China to flood
the world with inexpensive goods. But as labor shortages develop, Chinese
workers are starting to demand more money, adding to cost pressures from more
expensive commodities and creating the classic conditions for rising export
prices.
"Raw materials are going up; the price of oil is going up; wages are going up,"
said Peter Keller, managing director of the Merton Company, a plastic toy
manufacturer based in Hong Kong.
"It is true that costs in China are rising and, where possible, cost increases
are passed on," he said.
Merton is facing rapid wage increases at its plant in Guangdong Province. On
Sept. 1, the minimum wage is expected to increase by about 20 percent, to 780
yuan (US$98) a month in the province.
Intense competition is still squeezing profit margins, but Keller estimated
prices for products made under new contracts would be 5 percent to 10 percent
higher as a result of the higher wages and raw material bills.
The good news for consumers is that rising costs in China are not yet leading to
higher prices on store shelves, though they are probably chipping away at the
profits of importers and retailers, economists said.
H&M, the giant Swedish clothing retailer, finds itself grappling with how to
keep prices down as its suppliers demand more, said Nils Vinge, its director of
investor relations.
Some strategies, like shifting production to low-wage Bangladesh or Turkey, with
cheaper transportation costs to Europe, can reduce the impact, though not
forever.
"In the long run, this makes its way to the consumer," Vinge said.
"In the short run, it does not," he said.
Data suggests that Europe and the US are, like H&M, somewhere between the short
and long runs. Inflation has hovered slightly above 2 percent for most of this
decade in the 12 nations that use the euro, but has been rising lately.
It was at an annual rate of 4.8 percent last month in the US.
In Britain, the Bank of England's most recent inflation report notes that even
after stripping out volatile energy and metal prices, inflation is running at an
annual rate of 5 percent. It also highlighted a turnaround in prices of British
imports since 2004.
The European Central Bank pointed to a similar trend in the euro countries in
its latest monthly report. The sensitivity to higher price levels has focused
more scrutiny on China. The European Central Bank also noted that low-cost
countries like China helped reduce the inflation rate for imported goods by two
percentage points yearly from 1996 until last year for the euro nations.
Temple, the toy buyer, said he had managed to largely contain cost increases
from China through a mix of tough negotiating and lower profits. But soon
enough, the retailers he supplies -- like W.H. Smith, Harrods and Selfridges --
will find themselves under intense pressure to raise prices, he said.
"These prices have to be passed down to the retail chain next year," Temple
said.
"Prices have to go up," he said.
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