Limits to Growth: China and India

A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain. NYT

Both China and India are facing problems with shortages of workers, rising wages, corruption, and inflation, which are causing large western industrial companies to begin building new factories in other countries such as Vietnam and the Philippines.

Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.

China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.

...A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.

But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.

As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.

...even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.

That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion. __NYT

High fuel costs will soon enter the picture as well, perhaps inducing some western corporations to think closer to home when planning new factories. As automation takes over more of the manufacturing process, labour costs are less of a concern, and shipping costs take on greater relative importance.

China's remarkable growth rate has been part real and part bubble. Many analysts have been predicting an unlimited steep trajectory of growth in China for at least the next decade and a half. But the bloom may have partially gone off the rose. Chinese government duplicity has papered over much of the underlying instability in Chinese financial institutions and in Chinese society itself. Ham handed censorship of the internet and all public discourse, along with liberal arrest and harassment policies against perceived political dissidents, have projected a mirage of political stability to western analysts.

We will have to see how things look after high fuel costs, inflation, slower growth rates, less foreign investment, newer ways to circumvent government censorship, and less favourable international attention hit the CCP fan.