The end of the dollar and the rise of the Chinese consumer

When Mike Bellamy and I chose the China track at the University of South Carolina in 1997, it was still an avante garde career move. Both of us had been to Asia and knew China was going to play a key role in the 21st century. Neither of us thought we’d be reading articles like this only 9 years after graduating:

From the Telegraph (UK), “The dollar is dead – long live the renminbi”

I try to stay away from politics in this blog, but regardless of your party affiliation, you can’t honestly avoid the conclusion that Washington (and London) have spent too much money in the last decade. This profligacy was matched by most individual Americans, as the country went on a credit-fueled bender. I remember feeling the odd man out for not having a $400k mortgage. But while individual Americans seem to have learned their lessons, and are now saving and investing at record rates, the US government has not learned and continues to issue debt at an astounding clip – $7 trillion in debt in 2009 alone.

This is not about politics, but simple math. The USA cannot afford to spend this money, and the political class is failing the polity by not acting responsibly to control this accumulation of debt.

To date, the producing nations – Germany, Japan and most importantly, China – have underwritten our debt to keep the USA consuming to fuel their export-driven growth strategies. But reality is going to force a brutal readjustment and a change in behavior for both the producing and the consumer nations:

A seminal shift in behaviour is being forced on the deficit nations [i.e., USA, UK, Spain – ed.] where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.

This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations [i.e., China, Japan, Germany – ed.] can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.

The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed “crass Keynesianism”. [emphasis added – ed.]

So what does this mean for PassageMaker and those wishing to do business in China? From the sourcing point of view, there will likely be inflation in the renminbi, but I expect that to be outpaced by dollar inflation. No matter how you slice it, China is here to stay as a manufacturing center. And the Chinese are in much better position to enforce sound monetary policy with so much cash on hand. In this inflationary environment, PassageMaker’s services – Sourcing Feasibility Studies, Vendor Coordination and Assembly-Inspection-Packaging – are more valuable than ever. Think of them as an insurance policy or a hedge; you simply cannot afford the risk of a China learning curve any longer.

Though there will be increased wages for Chinese workers, especially in coastal zones, the reservoir of inexpensive labor is too vast to be exhausted for decades. China will retain the edge on cost of labor. And with the US government beholden to the Chinese, don’t expect any protectionist measures to last long. I do not expect a broad resurgence of US manufacturing.

BUT…for producers of unique products, especially agricultural products, like wine or coffee, this could be a grand time to start selling to China. As the Chinese middle class begins to consume to fill the gap, there is a huge opportunity for foreign firms to provide those goods. PassageMakercan help with just this, helping clients identify, establish and manage sales and distribution networks in China.

The future is as clear as mud, but I know we are all in for an interesting ride. In these times especially, you need to work with a company with solid experience in China. I hope you will consider PassageMaker and SafePassage as your business partners in an increasingly uncertain world.