kelaido

Should China Raise Wages?

Judging from the talkshows, hope of 'China economy de-coupling from the world' is gradually shifting from 'no impact' to 'no significant impact', to 'Oh My God!'.

Most on ground level I spoke to still believe the impact of credit crisis on China will not be severe ('China does not have banking problem'), how econ growth will stay healthy ('domestic demand is growing', '7.5% is still good'), how govt spending on infrastructure shielded China from the 1997/1998 Asian Financial Crisis ('secondary and tertiary cities still need massive infra investments'. Ttrue, but that crisis pales compared to this one). This high hope may account for the negative reaction to the surprised 1% rate cut. It is beginning to sink in that maybe it IS getting worse, quickly. China is not that de-coupled anyway. Those who still believe in fairy tales should have watched how the CEO of a huge mining company proclaimed on CNBC some 6 mths ago how China and India would keep commodity prices sky high FOREVER.

It makes so much sense for China to shift its investment away from more production capacities, but to consumption? Overnight or even next 12 months? In my book, no hope. How long did Japan go through that transition? The shift maybe the only worthy idea to counter the current drastic slowdown, but can it be achieved expediently? And what happens after the crisis is filed away in history books? Who will clean up the inflation mess now that the consumers are converted habitual spenders on credit? My bet is measures to quickly induce domestic consumption will lead not to actual increase in consumption, but to increase in savings, and possibly more speculative increases in real estate prices. Old habits die hard.
It may sound preposterous but if the aim is to rejuvenate labour intensive industries against a glabal demand slowdown, just buy off their excess capacities and give the products to everyone in the country. Requiring the recipients to pre-register their wishlist will create another layer of bureaucracy and more jobs. Insisting on home delivery will create even more transportation and service jobs. A state govt in Australia is reported today to be giving away laptops to each and every high school student. China can give away laptops, shoes, clothings, whatever with slack capacities.

We are where we are because of artifically cheap credit, for far too long. Throwing more credit at it will buy us some time but will also make the next crisis even worse. The next to hit is likely hyper-inflation, so while the govts are trying their damnest to shorten this global slide in this current context, they are actually paving a solid path for another in a different context to follow, immediately after.

Should China raise the wages? I dare not say how much is too much nor how little is too little, but I dare say it is too late.