The Independent Market Observer

9/20/12 – Will China’s Advantage Last?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 20, 2012 12:40:49 PM

and tagged Yesterday's News

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Although China’s not a big presence on the front pages today, it is again all over the news. As I mentioned yesterday, Bo Xilai’s future looks increasingly dark. Stories in the Financial Times (FT) on page 4, the New York Times on page A7, and the Wall Street Journal (WSJ) on page A10 all discuss that China has now implicated Bo in the cover-up of the murder of a British expat—the murder his wife was convicted of. The information apparently came from the (two-day) trial of Bo’s former police chief, which we discussed yesterday. How can a modern economy have a third-world legal system? I don’t think it can, at least not over time. China has benefited from low transport costs, from a perception that it was not a threatening country (at least not threatening to the West), and from very cheap labor, but all that is changing.

First, low transport costs have gone with cheap oil. Second, the perception that it is not threatening—well, look at all of the analyses I have posted over the past couple of weeks, as well as today’s “Panetta Urges Beijing to Resolve Island Spat” and “China to Probe Attack on US Envoy,” both on page A11 of the WSJ, not to mention “Brussels sidesteps China trade dispute” on page 1 and “West wrestles with China trade links” on page 4 of the FT. Finally, cheap labor is still there, but there are other countries that are as cheap or cheaper.

The upshot is that China is no longer the no-brainer choice for business. Who is? According to a special report on page 7 of the FT, “China’s unlikely challenger,” the answer might well be Mexico. If Mexico is taking jobs from China, I would suggest that others are as well. That is probably part of what is driving the Chinese slowdown, which is expected to continue, per “Chinese Official Warns Exports Will Stay Weak” on page A11 of the WSJ.

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