source: www.stratfor.com
Strategic Forecasting, Inc.
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GEOPOLITICAL DIARY: CHINA'S ECONOMIC DILEMMA
We have discussed how high oil prices are affecting China. It is difficult to gather statistical data on the situation, but anecdotal evidence is accumulating, and much of it indicates the sort of problems we were concerned about. For example, we are told that there were extremely long lines at a gas station on the Nanjing-Shanghai highway on Sunday. By Sunday evening, the station was closed, with a sign saying that they were out of gas.
In another anecdote, a discussion was held with a small manufacturer of a simple consumer product in Shandong province. He reported that increased competition, labor costs and the rise of the yuan have all worked to decrease his profit margins until they were barely positive. He reported that he could not afford to raise prices because of competition, but that he was still covering costs. He also reported that seven of his competitors in Shanxi province had recently closed their doors.
These are merely anecdotes, and they can be misleading, but they are the kind of anecdotes we have been expecting and are now occurring. The Chinese are trying to cap the price of gasoline and diesel fuel in order to sustain the economy, keep prices under control in both the domestic and export markets and maintain social stability. To do this, they need to control the maximum prices charged by Chinese oil companies, which are private enterprises not under Beijing's direct control. The inevitable result is shortages. The government is asking the oil companies to operate at a loss, and they are resisting, as one could imagine.
China can address the price of oil by allowing the yuan to rise, effectively decreasing its price. But if the yuan rises, the competitiveness of Chinese exports is going to be hurt. With the slowdown in the American economy, China's main export target, price sensitivity increases. If the yuan rises even a little bit, exporters will be hurt. As prices rise -- as they must because of energy and food costs -- inflation hits manufacturers two ways. Price of labor can rise, and, even if it does not, the demand for products in the domestic market contracts.
Reports of gasoline and diesel shortages and bankruptcies among manufacturers are the last things the Chinese need -- and not because of the conventional economic issues all countries have. Oil shortages, bankruptcies and other phenomena lead to unemployment. Unemployment in China can lead to social instability, and that instability concerns the Chinese government greatly, making this far more serious than a similar process might be in another country.
We are getting additional reliable anecdotal reports of extremely aggressive policing in Beijing -- both the presence of larger numbers of security personnel and much greater assertion, particularly toward Chinese shopkeepers. Such crackdowns are common to an extent, especially in provincial cities, but the level of aggressiveness against shopkeepers is somewhat new. One good explanation, of course, is the Olympics. But there is no question that Beijing is making sure the Chinese are aware that police are present and watching.
There are fuel shortages, bankruptcies, economic pressure and increased patrolling at the street level in areas not affected by the earthquake. The situation in China is beginning to ratchet up. It is reasonable to assume that the Chinese will need to take some steps to relieve the situation. Their problem is that any step they take will have other negative effects. Revaluing the yuan will help with oil prices, but will hurt exports badly at a time when the economy is already under pressure. The Chinese certainly have dollar reserves, but subsidizing fuel, exports and banks can eat into these with remarkable speed.
Copyright 2008 Strategic Forecasting, Inc.
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