Friday, May 28, 2010

Chinese workers on strike at Honda plant

Labour unions going on strike is quite common in India. Just this week, a section of the state run airline, Air India, had gone on strike for two days causing huge disruption, and inconveniencing thousands of passengers. The government responded by sacking dozens of employees, and derecognising a couple of the unions, in an uncommon move.

In China, of course, labour unrest is generally not in the news, and the government rarely publicises such actions. But this time, 1900 workers in a Honda auto component factory about 100 km from Hong Kong, have gone on strike since May 21, 2010. . And this action seems to have affected Honda's assembly line plants in other parts of China. Recently, a few other MNCs have faced labour unrest as well.
The New York Times reported, "Strike Forces Honda to Shut Plants in China" on 27 May 2010.
According to state-controlled Chinese media, workers at the transmission factory earn $150 to $220 a month and are demanding to be paid the same wages as Honda’s assembly plant workers, who earn $300 to $370 a month.
The official China Daily newspaper described the strike at the transmission factory as “the largest industrial action ever reported in China.” More workers have walked out in strikes at other Chinese factories, but the authorities have typically hushed up these events and have discouraged the official press from reporting on them.
Workers have sometimes complained that companies violate labor laws, but the strike in Foshan appeared to be a push to increase wages.
The newspaper cited a municipal official in Foshan as saying that the local government had investigated but had not found labor law violations by Honda at the transmission factory. The minimum wage has nearly doubled in the last five years in the factory cities of coastal China, to about $130 a month in cities like Foshan, with 11 provinces having raised their minimum wages by 10 to 20 percent so far this year.
Another report in the Financial Times, on May 27, 2010, says
The company confirmed that the industrial action had disrupted operations at car assembly plants in Guangzhou, the provincial capital, and Wuhan in central China.
The Foshan facility closed on Monday, with Honda’s three car factories following suit on Wednesday. According to the company, the stoppages could continue into next week, pending a government-led effort to resolve the dispute.
The workers appear to be acting independently and without support from the country’s only officially recognised union, the All China Federation of Trade Unions. “They have organised this themselves,” said an executive at the Foshan factory’s union office, who declined to give his name.
While the ACFTU has been more aggressive in establishing chapters at multinational companies, notably Walmart, it shies away from confrontation with management. The union’s website lists “the building of a socialist harmonious society” as one of its “primary tasks”.
Strikes are also rare at multinationals, which tend to pay higher wages and offer better conditions than their Hong Kong, Taiwanese and domestic counterparts. Jiangsu province began the trend in February when, after a two-year freeze, it raised the officially mandated minimum monthly wage by 13 per cent to Rmb960 ($140). Honda employees in Foshan earn about Rmb1,500 ($220) per month and are demanding an increase to Rmb2,000-Rmb2,500.
Foreign investors are under pressure to increase wages as the country’s manufacturing sector shakes off the effects of the global financial crisis.
Honda is the second high-profile multinational investor confronted by a serious labour crisis in recent weeks. Foxconn, a contract manufacturer for Apple, Dell and Hewlett-Packard, is struggling to contain a spate of suicides at a sprawling plant in Shenzhen employing 300,000 workers.

Wednesday, May 26, 2010

Why India Must Swing

This article by Nitin Pai was published in Yahoo on May 25th 2010. You can read the full article here.


Part due to the wishfulness of the rhetoric surrounding Barack Obama's campaign and part due to the economic crisis it sunk into, it became fashionable in the United States to ignore geopolitical realities, and instead engage in a fresh bout of fantasising about China. Influenced by intellectuals such as Zbigniew Brzezinski it became fashionable to believe in the existence of a tidy bipolar world where the United States and China, the G-2, would sit together and shape the twenty-first century. Tidy and familiar as this world may be to Cold War-era strategists, it does not even begin to mirror reality: it took, for instance, no less than a Group of 20 countries to co-ordinate economic policies to combat the global recession.


... If the United States has the capacity to project power globally, China has nurtured proxies like Pakistan and North Korea to tie it down both indirectly and inexpensively. If the United States outguns it in traditional areas of warfare, China has sought to gain an advantage in cyberspace and outer space. The waters of the Indian Ocean therefore, are merely one of the several theatres where China and the United States will challenge each other.

To be sure, the United States military establishment is aware, concerned and preparing for a confrontational relationship with China. However, even at the best of times Washington-like New Delhi-finds numerous domestic vectors pulling in different directions to be able to fashion a focused strategy. Worse, at this moment, the Obama administration is not only confused by the dissonance between its beliefs and reality. It is also constrained by a weak economy, fiscal pressures and a mountain of debt that it owes to its geopolitical rival.

What does this mean for India?

First, despite irreconcilable differences in the way India and China view international relations, the high Himalayas prevented large-scale military conflict between the two civilisations for nearly two millennia. ...

Second, given the relationship with China, it is in India's interests for the United States to remain the predominant power in the world....

If strategic sense were to prevail in Washington, the United States would do everything to woo India into a tight alliance. There was a period during the much-maligned George W Bush administration that it appeared that the United States had chosen just such a course. No longer-given its bipolar fantasies, the Obama administration has substantially abandoned the project.


To paraphrase Henry Kissinger, India's options toward the United States and China must always be greater than their options toward each other. It serves "our purposes best if we maintained closer relations with each side than they did with each other." ...

... ...

The reason why India is unable to get the swinging right is perhaps because our political leaders and much of the strategic establishment are wedded to their pet dogmas. Prime Minister Manmohan Singh, for instance, is committed to improving relations with the United States. And it was Mr Ramesh, after all, who popularised-if not coined-that ghastly word, "Chindia". Now turn on your television or open the op-ed page of a newspaper, and you'll spot their opposite numbers, forever opposed to the United States or China or both.


Monday, May 24, 2010

Niall Ferguson assesses China and India

Niall Ferguson, Harvard historian, is one of the world's authors on geoeconomic, global systemic, money and finance, and other key international strategic issues. He delivered the Peterson Institute's ninth annual Niarchos Lecture on May 13, 2010, on the topic "Fiscal Crises and Imperial Collapses: Historical Perspectives on Current Predicaments." The transcript is available here.

A few extracts from the question-answer session following Niall Ferguson's lecture:

"Really, up until now, since 1972, since the opening to China, we’ve taken for granted that relations between China and America will be harmonious. And I’ve even written about Chimerica as a kind of happy marriage between the spendthrift and the saver. But the big concern is that that marriage is unraveling before our very eyes. What strikes me when I come to Washington is complacency on this particular issue, that when I raise the question, “Could the Chinese have a different strategy?,” the answer I always get is, “Well, they need us as much as we need them,” and that’s an illusion because they don’t. The lesson they’ve learned from the financial crisis is that they don’t depend on the US consumer anymore, that they can sustain something close to double-digit GDP growth by their own means and in trade with Asia. I think we’re in that sense at a big turning point in relations between China and the United States, but only one partner seems to see that."

"I think there’s also an important point to be made about China. China, I think quite likely, will overtake the United States in terms of GDP, but of course things could go wrong. But I’m not sure China’s a great place for a foreign investor compared with India. And I came away from a trip to India back in January deeply impressed by the fact that here is the second most populous country in the world, seems to be the most populous, and it has the rule of law, it has representative government, it has free speech, and it does, therefore, have the institutional foundations for an innovative and entrepreneurial society, which I’m not sure you can have with an authoritarian, oneparty system that has a planned economy at its core."

"So I guess my Asian strategy has become more Indian as this crisis has worn on. The Indian strategy is so much more self-propelled. There is an Indian middle-class, they are consuming, and it seems a politically stable country."

Saturday, May 15, 2010

Renminbi Revaluation Won't Trigger a Shopping Spree

Zhiwu Chen's article "Renminbi Revaluation Won't Trigger a Shopping Spree" was published on
YaleGlobal on 12th May 2010.

Here are a few excerpts:

Revaluation of the renminbi will simply result in a shift of manufacturing among emerging markets, leaving the US with a somewhat smaller trade deficit, higher prices for imported goods and higher interest rates, but not necessarily higher levels of employment. Neither is it likely to increase domestic Chinese consumer spending that the world wants to see. China’s domestic spending will rise only when the government releases its hold on the economy and households receive a larger share of GDP.

Even if the renminbi were to appreciate by 50 percent, raising Chinese labor costs to 10 times
less than those in the US, manufacturing would still not return to America.At most, US retailers
would source not from China but from other emerging economies. Revaluing the renminbi won’t affect America’s trade deficit or employment as wished for.

Reasons often mentioned for the challenges in boosting private consumption in China include people hanging on to their savings in the absence of an adequate social safety net and the lack of
sufficient financial products to insure against future uncertainty. Depressed interest rates for
bank deposits, a means of subsidizing the state sector, amount to a transfer of income out of
households, which also negatively affects private consumption. But more fundamentally, private
consumption has failed to grow in pace with China’s GDP, because the Chinese economy is still largely state-owned and because government taxation is, in the absence of functioning democratic institutions – taxation without representation – virtually unchecked.

State ownership is a major factor depressing private consumption growth in China, because it
prevents households from directly benefiting from land-value appreciation, enterprise profits and capital gains. One might think that state ownership benefits all and that the SOE profits and
state-asset appreciation serve to reduce or eliminate taxation on citizens’ income.

State ownership and control of resources in the past allowed China to industrialize fast. But now
state control is a fundamental obstacle to desired structural transformation: As it acts to depress China’s private-consumption growth, it is also partly responsible for the global imbalances. Therefore, while a revalued renminbi can superficially adjust the international trade structure, privatizing state-owned assets and greater say for taxpayers in government budgeting and fiscal policy can ignite a fundamental correction process in China that would also benefit the global economy.

Wednesday, May 12, 2010

Would revalution of Chinese currency impact its exports?

Continuing the earlier discussion on the value of Chinese yuan, here is another article from the Wall Street Journal Asia, that finds that given the nature of Chinese exports, a 5% re-valuation would barely add 25 cents to the price of a T-shirt sold in the US. Joseph Sternberg's article, "The Irrelevant Yuan?" was published on 5 May 2010. Here are a few excerpts.
To some in Washington these days, adjusting the yuan-dollar exchange rate is the fix for all America's ills. That single number supposedly determines which jobs stay in the United States and which go to China. It dictates which and how many goods move where. It's attributed the mystical power to raise or destroy mighty economies by its movements or lack thereof.

Except that the real world doesn't work that way. Recent conversations with executives responsible for supplying clothes from Asia to American shelves suggest that the yuan case may not be as clear-cut as U.S. revaluationists would have us believe... ...

Revaluationists implicitly, and wrongly, assume that the bulk of the value of Chinese products is exposed to the exchange rate. If that were true for any industry, it would be true in apparel where yuan-denominated labor still accounts for a much higher proportion of costs than in more mechanized manufacturing. Yet it ain't quite so, as an American executive at a children's clothing retail chain recently explained. (He and the other executive in this piece asked to remain anonymous given the political sensitivity of the issue.)

This executive's largest expense is fabric, which accounts for roughly 50% of the final cost of a piece of clothing. He also figures in a profit margin of about 15%, depending on the product. That leaves 35% of his cost for labor, utilities and the like—yuan-denominated expenses. As for the fabric cost itself, about half of that (one-quarter of the cost of the finished garment) is cotton, a globally traded commodity priced in dollars. The fabric manufacturer also might take a 15% profit, leaving 35% for yuan-denominated costs.

So take a $10 pair of boy's summer shorts: $2.50 is cotton, the price of which won't change with a revaluation. Another $2.50 (perhaps) is profit. That leaves roughly $5 in Chinese labor and other yuan costs that are affected by a revaluation. Subject that portion to the 5% revaluation (that's at the upper range of current expectations for what Beijing will do) and the shorts now cost . . . $10.25.

That assumption of a surprisingly large profit margin is significant, as a chat with another American businessman makes clear. His company sells a range of brands, from high-end to low-end, and manufactures throughout Asia. When asked about the possible effects of a yuan revaluation, he first observes that his company no longer makes its cheapest products in China anyway. Rising labor costs, higher taxes on foreign businesses and the like have pushed ultra-low-price T-shirts and jeans to the likes of Vietnam or Bangladesh. What remains in China are higher-value-added, more profitable name-brand products... ...

In response to Joseph Sternberg's article, Michael Ludd, a lawyer based in Hong Kong wrote an interesting letter to the editor at WSJ.

Take a pair of jeans made in Thailand for $3.19 a pair. Shipping those jeans to the United States adds about 50 cents of cost to each pair, after accounting for freight and insurance. At brand-name stores in the U.S., a pair of those jeans sells at a retail price between $37 and $79 (plus delivery, if the purchase is made on the Internet).

The mark-up in price captures the real value added by the intellectual property of the design, advertising, distribution and financing—all services often provided by U.S. companies, in dollars. Taking the higher retail price, less manufacturing and shipping, about $75.31, or 91% of the final price is attributable to service businesses and of course profit.

The value of the yuan in this process is almost immaterial.

Saturday, May 8, 2010

Tagore remembered in China

A year long celebrations have commenced to mark the 150th of India's national poet Rabindranath Tagore in May 2011. Tagore was the first Asian to be awarded the Nobel Prize in literature in 1913. In the 1920s, Tagore had visited China thrice, and made many friends. Tagore's poems were first translated in Chinese in 1915. Tagore too had referred to China and its civilisation in many of his writings. But his first visit in 1924 generate quite a bit of controversy, coming as it did in the aftermath of the May Fourth Movement earlier. Tagore was criticised by both the Marxists and the Kuomintangs.
"I say that a poet’s mission is to attract the voice which is yet inaudible in the air; to inspire faith in the dream which is unfulfilled; to bring the earliest tidings of the unborn flower to a sceptic world."
- Tagore: "First Talk at Shanghai", Talks in China (1924)
In 2006, the People's Daily, the official Chinese newspaper, listed Tagore among 50 international personalities who influenced modern Chinese thinking.

Xu Zhimo, the Cambridge educated Chinese poet, and his wife, Lu, were friend and admirer of Tagore. The couple had hosted Tagore in their house in the Simingcun in the 1920s. At the Shanghai World Expo this year (2010), a documentary on Tagore is being screened. And this month (May 2010), the Indian President Pratibha Patil will inaugurate a bust of Tagore in the former French Concession area of Shanghai.

Here are two related news items on Tagore in China today.
"Tagore's poems remembered by Chinese", by Anurag Priyadarshi in the Shanghai Daily, on 30 April 2010.
"Tagore in China", by Bivash Mukherjee, in the Hindustan Times, on 8 May 2010.

And here is an interesting and scholarly discussion on Tagore's visits to China.
"The Controversial Guest: Tagore in China", by Sisir Kumar Das, in

Here is a summary discussion on the controversy surrounding Tagore's first trip to China in 1924. "Rabindranath Tagore's Visit to China", by Lata Iyer, on 15 June 2009.

Finally, here are two excerpts from two talks given by Tagore. One, he delivered in China in 1924. And the second he gave on the occasion of the inauguration of the Cheena Bhavan (China House) at the Viswa Bharati university in Shantiniketan in 1937. These were published in the book, The Himalayan Gap.

Monday, May 3, 2010

Misplaced concerns over Chinese currency

Last couple of years, there have been a rising demand among a section of policy makers to accuse China of keeping its currency undervalued, and thereby gaining an unfair trade advantage for its exports. A recent meeting of G-20 finance ministers and central bankers, India and Brazil too lent their voice calling for a stronger Chinese yuan. But Jagdish Bhagwati & Arvind Panagariya, two eminent Indian economists based in Columbia University, argue that "India errs by lending its voice to calls for a stronger Chinese yuan", in the Economic Times, on 3 May 2010.
Economic Times

For some time now, the US Congress and some Washington think tanks have aggressively sought to turn the bilateral exchange rate issue between the US and China into a multilateral issue. They have done this by asserting that the undervaluation of the Chinese currency hurts not just the US but Asia and others as well.

The underlying argument is based on a syllogism. The first argument is that an undervalued renminbi is the root cause of the Chinese current account surpluses and the US current account deficits. The second argument is that the export expansion so achieved by China robs countries such as Brazil and India of their export markets... ...

But neither argument is acceptable. Consider first the error in the second argument. Just because China fixes its exchange rate against the US dollar does not mean India cannot choose the value of its currency against the dollar or other currencies including the renminbi at the level it sees appropriate for itself. What happens to India’s exports and imports depends on what it does to its own exchange rate, money supply and fiscal deficits and how its savings and investment are balanced... ...

The exports-to-GDP ratio grew from a low of 11 per cent in fiscal year 1997-98 to 23.6 per cent in 2008-09 . This was a faster expansion of India’s exports than during any other 11-year period in its history. If the Chinese dollar peg during 1997-2005 had any effect on India, the movement in the rupee’s exchange rate more than neutralised it... ...

Besides, the more than 18 per cent appreciation of the renminbi vis-a-vis the dollar between 2005 and 2008 made little dent in the US current account deficit. From $631.1 billion in 2004, it rose to $748.8 billion in 2005 and $803.5 billion in 2006 before declining slightly to $626.6 billion in 2007 and $706.1 billion in 2008. Going by these numbers, the exchange rate is surely at best one of many factors explaining the US current account deficits.

The US runs a current account deficit with more than 100 countries, including very large deficits with Germany and Japan. The combined current account surpluses of Germany, Japan, Switzerland and Norway far exceed the current account surplus of China. If one believes in the primacy of the exchange rate as the explanation of current account imbalances, one would have to call for these countries also to revalue their currencies! ... ...

India also makes a major tactical error by lending its voice to the calls for the appreciation of the renminbi. With its savings rate high and rising, it too could run into the Chinese “problem” of a current account surplus. It is surely a mistake then to go down this road where shortsighted US politicians and their enablers would have us go. Politically also India makes an error by taking sides in what is essentially a China-US issue. We have enough problems with China not to want to add a gratuitous one. Will the prime minister take note?