Is China about to blow up?

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Global Trade, Supply & Demand

Is China at risk of Blowing up as the headline in the British publication the Daily Telegraph reads?

Coming fast on our blog last week (I wonder if that is what prompted the Telegraph to cover this topic?) the paper makes the case that not only is inflation putting China in particular, and Asia in general, at risk of a crash but they add energy and transport into the mix ” the former leading into the latter. Pointing to the number of low cost manufacturing jobs coming back to the US or Mexico such as furniture, shoes, textiles, etc, a trend we have seen considerable anecdotal evidence of ourselves, the article explains how freight rates have tripled on the back of rising fuel costs. Of how energy prices in China have been capped by the government and subsidized to be kept low but how this is a temporary  tactic that can not be perpetuated for long. The Asian economies and business models were built on the concept of cheap labor but were underpinned by cheap energy. China’s use of energy per unit of gross domestic product is three times that of the US, five times Japan’s, and eight times Britain’s. China’s factories were not built with current energy levels in mind and when the true impact of current costs is fed through the impact could be dramatic.

The affect of high energy costs on the metals markets has been significant with costs passed rapidly down the line to the fabricator or end user. To what extent a relocation of manufacturing would impact the patterns of consumption remain to be seen, but as we have seen with the distortions in the US steel market it is as much where product is consumed as how much is consumed that has the most significant impact.

–Stuart Burns

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