Bloomberg News

China Exports Fade as Inflation Eludes Targets: Cutting Research

July 26, 2012

China Exports Fade as Inflation Eludes Targets

While China’s trade data are volatile, there are signs that the country’s export powers are slipping. Photographer: Nelson Ching/Bloomberg

China’s fabled export competitiveness is on the wane and that has implications for the rest of the world economy, conclude Morgan Stanley economists Spyros Andreopoulos and Sung Woen Kang.

Their estimates show the profits of Chinese exporters from trading with the U.S. shrank 20 percent to 30 percent between 2004 and 2010 as domestic labor costs grew and their currency’s climb against the dollar lowered revenue once translated back into yuan.

With such forces likely to keep weighing on margins, chances are the rest of the world will have to pay more for Chinese goods, resulting in “global developments of high importance,” the economists said in a July 25 report.

While China’s trade data are volatile, there are signs that the country’s export powers are slipping. China’s February trade deficit was the biggest since at least 1989. In April, the International Monetary Fund cut its outlook for the current account surplus, which it estimates had already fallen from 10.1 percent of gross domestic product in 2007 to 2.8 percent in 2011.

Higher Chinese prices will eat into disposable incomes worldwide and fan global inflation, while allowing other economies to claw back manufacturing share, they said.

“Globalization may already be turning from tailwind to headwind for consumers the world over,” the economists said.

* * *

Inflation targets are becoming harder to hit.

That’s the conclusion of Societe Generale SA economist Anatoli Annenkov, who said in a July 20 report that central banks face new challenges in reaching their goals. Capital is increasingly flowing into their economies and calls are growing louder to juggle price stability with financial stability.

The result is “the pressure on inflation-targeting central banks to deliver on multiple targets will increase,” said London-based Annenkov. “As a consequence, monetary policy may become increasingly difficult to assess and anticipate.”

Pioneered by New Zealand two decades ago and subsequently adopted in the U.K., Canada and Australia, inflation targeting requires central banks to calibrate monetary policy so that inflation hits a set rate over a certain time frame. While central banks have traditionally faced inflation stronger than their targets, they increasingly find it undershooting as the global economy remains weak.

Central banks will find hitting the target even harder following the five-year-old financial crisis because they have to take more into account when trying to manage prices, Annenkov wrote.

One threat is that capital probably will be drawn to countries that target inflation as investors seek economic growth and stability. That will probably push up currency values, pulling down inflation.

Having taken the lead in developing targeting by publishing likely paths for interest rates, Norway and Sweden are already facing the challenges Annenkov highlights. Average inflation has undershot targets in both countries by 0.5 percentage point since 1999, he wrote. Now, the euro crisis is leading investors to push money into these safe havens, while in Norway interest rate cuts are also being blamed for fanning a housing boom.

“With poor target fulfillment, pressure will undoubtedly increase on explaining why this has been the case and what factors could motivate it,” Annenkov said.

* * *

Economic crises may make us healthier.

The 2008 economic turmoil in Iceland, which included the collapse of three major banks and the deepest recession in six decades, led to reductions in all “health-compromising behaviors” studied by five economists in a study released this week by the National Bureau for Economic Research in Cambridge, Massachusetts. That included smoking, heavy drinking, consumption of fast food and indoor tanning.

It also led to the reduced consumption of fruits and vegetables, although there was increased buying of fish oil and sleeping the recommended amount. The shifts were partly explained by changes in work hours, household income, wealth and mental health, the economists said.

A 27 percent increase in prices between 2007 and 2009 was viewed as a particular driver of health choices, they said. Price changes were found to have less of an effect on demand for alcohol and sugared soft drink, compared to that for smoking, sweets and fast food.

* * *

It’s harder for Europe’s peripheral nations to adopt the economic modernization that Germany undertook, which revolutionized the region’s biggest economy, according to Darren Williams, chief European economist at AllianceBernstein Holding LP.

When the euro began trading in 1999, Germany was dubbed the “sick man” of Europe as it struggled to deal with the fallout from east-west reunification. Unable to devalue its way to growth through a lower currency, it enforced an “internal devaluation.” The aim was to make its products cheaper than trade rivals and thus turn the economy more competitive.

That was achieved by slashing labor costs enough to reduce the implicit price-adjusted exchange rate by 10 percent. Amid the squeeze, German consumer spending rose just 0.6 percent per year from 1999 to 2007, compared with a 2.1 percent gain in the rest of the euro region.

In return for the pain, the gain was a more efficient, export-driven economy that has weathered five years of financial crises better than its neighbors, Williams said.

While that experience is highlighted by German policy makers as a template for the likes of Greece, Williams says what’s different is that Germany’s period of retrenchment occurred when the rest of the world economy was strong, damping the impact on output and jobs. At the same time, cutting wages makes it harder to stabilize household and government debt because lower salaries reduce income and tax revenue.

A third reason is that to realign their price levels within the euro region, the peripheral countries need to improve their competitiveness against Germany, a country where wage settlements are likely to remain under control and which is unlikely to embrace turning less productive.

“While Germany’s experience offers some guidance for the periphery today, it is clear the path ahead will be long and arduous,” Williams said.

To make it easier, governments may want to shift taxation away from labor by lowering company payroll taxes and toward consumption by raising indirect taxes, he said. A weaker euro is another channel, although it would have to fall further to serve as a panacea, he said.

* * *

Experience counts when it comes to heading a Formula One motor racing team.

A study of every Grand Prix in the last 60 years, involving almost 18,000 cars, found teams are more likely to be successful if run by former drivers or mechanics rather than by engineers or professional managers.

That’s because so called “expert leaders” command greater credibility among teammates and their talent can draw other skilled personnel to join them, according to the authors of the July 20 report, including Amanda Goodall of Cass Business School in London. The conclusion meshes with her previous finding that hospitals run by doctors outperform those helmed by managers.

“Leaders should first be experts in the core business of their organizations, whether they are bankers, hospital administrators, restaurateurs or technology innovators,” the study said. “Being a capable general manager alone is not sufficient.”

To contact the reporter on this story: Simon Kennedy in London at

To contact the editor responsible for this story: Craig Stirling at

The Good Business Issue
blog comments powered by Disqus