2009-05-26

Andy Xie: Efficiency's Urgent Cry for Attention | 谢国忠: 求诸效率

Efficiency's Urgent Cry for Attention discusses where China's economy needs to go from here. Read the whole thing, but below are two passages with investment implications:
Most analysts argue against inflation on grounds that excess capacity due to slumping demand will keep inflation in check. Hence, they say, the liquidity boom won't be a problem until the global economy has fully recovered. I think this is faulty logic. Financial markets can channel liquidity directly into inflation through commodity speculation.

Despite declining oil demand, for example, prices have nearly doubled from their lows this past spring. This mainly reflects rising financial demand; a rising amount of liquidity has flowed into oil futures, which is being powered by expectations of inflation. As in the 1970s, these expectations alone are capable of turning liquidity into inflation.
He also sees unions and wage pressures as inflation threats. Later, he explains why manufacturing will be unable to reduce costs:
Excess capacity won't hold down inflation for two reasons. First, manufacturing value-added is much lower than it was before relative to raw material costs. Globalization has forced multinationals to shift production to low-cost countries such as China. In the process, manufacturing has decreased in importance. For example, steel prices are moving in tandem with iron ore prices, despite huge processing overcapacity. The reason is that iron ore accounts for more than half the cost of production. Coking coal is another quarter of the cost. Equipment depreciation, labor, and profits account for small shares of product price.

Second, much of the overcapacity needs to be scrapped because demand won't recover to yesterday's levels. The bubble exaggerated demand in many industries. Automobile, IT and financial services stand out in this regard. Credit won't be as cheap in the future. Auto demand will reflect that. The industry may shrink by one-third.
The financial sector can act as an escape valve for inflation. New money pushes asset prices higher and then filters through the economy to cause commodity and wage inflation. As the financial sector contracts, that liquidity will be moving out of the financial sector (and new money will not enter) and into the commodity sectors of the economy. Unlike commodities, where overcapacity lasted for almost two decades, overcapacity in the financial sector can be eliminated rapidly.

Deflation remains a threat and will until it ends, but the seeds for inflation are being sown.

求诸效率

No comments:

Post a Comment