Editor's note: Last week, Jim Jubak examined the Chinese economy's impact on world financial markets. In this week's column, he takes a closer look at the role China plays, and will continue to play, in the everyday lives of Americans.
Just walk into the toy section of a
if you want proof that China's emergence as a global economic power reaches deep into the lives of all of us here in the U.S.
China manufactures about 80% of all toys sold in the U.S., even such iconic products as Etch A Sketch. In 2001, Ohio Art moved production of Etch A Sketch (which it playfully likes to claim is the world's first laptop) to Shenzhen near Hong Kong from Bryan, Ohio, where the toy had been made for 40 years.
Count the ways this one example ripples across our economy:
- Manufacturing jobs that paid $9 an hour in Bryan are shipped to China, where workers at the new manufacturing plant make 24 cents an hour.
- Toys are cheaper at Wal-Mart, where an Etch A Sketch sells for just $9.99. (That's pretty remarkable for a toy that sold for an inflation-adjusted $23.99 in 2004 dollars when it was first introduced in 1960.)
- There's more pressure on the pensions and health benefits of U.S. workers because most of the workers they're competing with don't get those costly "perks."
OK, you're familiar with the lost-job story by now. But the China syndrome -- which I'm using as shorthand for all of the changes to the global economy brought about by the entry of China, India and other rapidly growing economies onto the world stage -- is by no means limited to job losses and lower prices at Wal-Mart. It extends far deeper into our lives than most of us realize. And for better or worse, China will have even more of an influence here in the years ahead.
Let me dust off my trusty crystal ball and sketch eight ways that China matters -- or will matter -- in our everyday lives.
China has helped produce lower mortgage rates.
China's influence in the U.S. bond market extends far beyond its own purchases of U.S. Treasuries and "agency paper" issued by
and the other government agencies that dominate the market for mortgage-backed securities.
Price competition from Chinese manufacturers, who buy and sell in a yuan pegged to the U.S. dollar, kept the Japanese and other central banks on a Treasury-buying spree to keep the value of the yen, the South Korean won and other Asian currencies from climbing to the point that these countries lost export share to Chinese companies.
In the 12 months that ended in April, foreign central banks bought $260 billion in U.S. Treasuries and agency paper, leaving the
purchases of $33 billion trailing in the dust. It's hard to gauge the total effect of all that foreign buying on U.S. bond yields, but the buying has probably kept the yield on the U.S. 10-year Treasury note down by somewhere between a half and a whole percentage point. And we have all benefited because the rates on most U.S. mortgages are linked to the yield of the 10-year note.
Of course, now that the Japanese look like they're temporarily out of the business of supporting the yen, the effect works in reverse. In the short run, it's another force putting downward pressure on Treasury prices -- and upward pressure on interest rates. In the long term, though, foreign buying of Treasuries will keep U.S. interest rates lower than they would be if the Treasury market had to depend on just U.S. buyers.
Chinese competition has cut inflation in manufactured goods and brought more inflation in commodity prices.
It's not just the lower costs that Ohio Art or
get by moving production to China that have reduced inflation here in the U.S. Competition with cheaper foreign goods and lower-cost foreign factories has made it almost impossible for companies to raise prices on manufactured goods sold in the U.S. Even a modest price hike has been almost a guarantee that the company would lose market share.
The deflation in manufactured goods, however, has been offset by inflation in commodity prices in food and energy prices. So while the consumer price index rose 1.6% year over year in March, food climbed by 3.2%. The cause? Competition in the markets from Chinese buyers for everything from soybean oil to nickel.
Chinese demand has meant higher energy prices, especially at the gas pump.
The energy inflation being exported from China is a special case just because it's so extreme. Wall Street broke out in a sweat after the March inflation numbers because inflation over the last three months has revved up. If you annualize the change in the CPI during the last three months, inflation is running at a rate of 5.1%. But that shrinks into insignificance compared with energy inflation, which has run at an annualized 38% rate over the same period.
I certainly don't expect energy prices to keep climbing at that rate, but I do expect inflation in the sector to stay well above inflation for the economy as a whole. Energy inflation was, after all, 6.9% in 2003. Consider this one example: Chinese consumers bought 2 million new cars in 2003. By 2014, projections put 100 million cars on China's roads.
China has resurrected 19th-century imperialism with a twist.
In the bad old days, imperial powers turned less powerful regions into colonies. From the colonies, they then extracted raw materials and sold manufactured goods on their own very favorable terms of trade. In the 21st century, don't expect a return to such naked grabs of real estate. Instead, the industrial economies will fight a much more subtle economic battle to lock up critical commodities.
You already can see this in northern Asia, where China and Japan have been brawling over the route of an oil pipeline from Russia's Siberian fields. China thought it had a done deal to send the pipeline to Daqing in the heart of China's oil-producing region. But Japan now seems to have the inside track for a route that terminates in the Pacific port of Nakhodka -- and bypasses China's oil fields.
The U.S. has one key edge in this global competition because it is the sole industrial power with the ability to project military force just about anywhere in the world. A key question is how often the U.S. will choose to employ that edge in the competition for resources.
China has helped generate the explosive growth in for-profit education.
When the job market gets tough, the tough go back to school. And the toughest go back to school while they're still employed. UBS Financial Services calculates that about 17 million adults in the U.S. fit this bill. It's these people, fearful of the changes now sweeping through the economy, who are fueling the boom in for-profit education. UBS projects that revenue at a company such as
will grow at a rate of 55% a year over the next five years. Expect the traditional colleges and universities to react to this market shift with increasing numbers of nontraditional, postdegree programs for working adults. The college campus will be a very different place in a decade.
China will accelerate development of the next generation of the Internet.
The new global economic system assumes subassemblies are made in Malaysia, assembled in China for a Japanese company and, finally, sold to U.S. consumers through Wal-Mart.
The flow only works if a company operating different functional divisions under different ownerships can communicate vast quantities of information in real time. The Internet as we now know it is showing signs of stress and overload. So companies operating within this global economic framework will push for the Internet's next generation to reach commercially valuable stability as quickly as possible.
China is increasing the importance of logistics to business.
These global virtual companies don't just have a need to communicate vast amounts of data. They also must be able to track an immense number of real objects in varying states of market readiness.
It's hard enough to manage a supply chain if all you have to do is walk from one end of the plant to the other to see if you have enough left-door arm rests to keep your SUV production line rolling at full speed. Now imagine that the left-door arm rests are coming from an auto-interiors assembler in Canada as part of an interior unit that itself relies on parts makers in Shanghai, Detroit, Stuttgart and Malaysia.
That logistics nightmare will require new systems for tagging and tracking in real time; these systems are just now emerging with radio-frequency identification tags and global satellite positioning systems.
China could make bottlenecks a way of life.
In an ideal world, the combination of high-technology logistical systems with real-time data-sharing over the Internet would result in part A arriving at site B just in time to meet up with assembly C. But the real world is messier than that. Railroad cars wind up in the wrong place or just don't exist in sufficient numbers. An unexpected spike in demand meets up with health scares like SARS, and a key factory shuts down just at the worst time. I can see three results:
- Massive and rapid swings in the prices of limiting inputs such as railroad cars or ocean freighters.
- A sharp spike in consumer dissatisfaction as we hear more and more often, "I'm sorry. That's not in stock."
- A rapid differentiation between companies that actually master this system (and gain lots of new customers and make lots of money) and those that don't (and go out of business).
That's about as far as I can see with my crystal ball. And as with any exercise in imaginative projection, I'm sure that any one reader will disagree with some or all of these potential trends.
But I think we can agree on one thing: The economic phenomenon that we call China will reshape daily life in the U.S. over the next decade in ways that we've just begun thinking about.
Changes to Jubak's Picks
I think I'm spitting into the wind with
, and it's time to sell before a modest loss becomes something truly damaging.
Car sales have shown signs of slowing under the impact of higher gas prices. Inventory at
of its gas-guzzling Cadillac Escalade, for example, now stands at 125 days of sales, about twice the target level. Wall Street fears that this is just a sign of things to come as gas prices stay high and interest rates start to move up. This is forcing automakers either to sweeten their financing deals for buyers or face slowing sales.
I'm selling BorgWarner out of Jubak's Picks with a loss of 11% since I added it to the portfolio on Jan. 13, 2004. (Full disclosure: I will sell my personal position in BorgWarner on May 14.)
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: BorgWarner. He does not own short positions in any stock mentioned in this column. Email Jubak at