A couple of weeks ago, I announced that our second What if, What Else & What are the odds meeting would take place, and that we would discuss inflation. Well, tonight was the night, and for nearly 3 hours we debated the issue of inflation.

Who was “we”? Well, “we” were 5 in total, and represented a span of groups from big 4 to web 2.0… and while I was the only tie between the 5, would say that it took no time at all for a common ground to be found and the fun to begin.

As a starting point, I was hoping to cover the following questions:

• What is the current real inflation rate?
• Is inflation likely to increase or decrease over the next 6 months? 12 months? 24 months?
• What impact will inflation have and who will be impacted the most?
• Can the central party continue to hold prices at current levels? Should they?
• What impact will/ could inflation have on foreign operations in China?
• What is the best way to hedge/ take advantage of a period of high inflation?

and of course, while we strayed off course often (the venue did serve alcohol), we were able to answer 5 of the 6 above.. and then some. so, true to my word here are some of my notes from the evening. I will be sending out a complete set to those who responded on the previous post - but I gotta say, the majority of people use anon or ridiculously fake email addresses…

Click see more for the notes.

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Joseph Quinlan has written a very interesting piece where he debunks a lot of the myths that Americans hear about the deficit, American FDI into China, and the RMB.

According to Quinlan, these are the things everyone should know (Note: I have cut his article quite a bit to pull out keys to his argument and then added my thoughts in italics):

1. U.S. Foreign Investment in China — Not As Much as You Think

U.S. foreign direct investment (FDI) to China has climbed over the past decade, but a little perspective is in order. The $15.5 billion the U.S. has sunk in China this decade equates to only 1.6% of the global total. U.S. FDI in Ireland and Germany was roughly triple the level of investment in China over the same period. On a historic cost basis, China accounted for less than 1% of total U.S. foreign investment in 2006. In 2005, the last year of available data, of total assets of U.S. foreign affiliates, just 0.7% of the aggregate was in China.

Interesting analysis, and I would be interested to see how he accounted for the American firms who used Singapore and Hong Kong as their vehicles.   If they were not counted, I am not sure what the delta is, however HK has historically accounted for the vast majority of FDI spend going into China

2. The U.S. Enjoys a Huge Lead over China in FDI

U.S. firms have far better access to the Chinese market than their Chinese counterparts in the United States. This investment gap represents a strategic competitive advantage to corporate America; hence China’s interest in rebalancing the competitive playing field by acquiring various U.S. companies.

AMEN Brother!  Lenovo and Haeir aside, there is definately a bit of hypocracy going on in this area.  Many Chinese firms, while interested in the U.S., are still choosing other markets (Australia and E.U.) as there is a belief that the hurdles are lower.  Perhaps the fact they can get visas to these countries is a reason for that feeling?

3. What really attracts U.S. firms to China? Consumers

That the Chinese consumer is more important to U.S. firms than the Chinese laborer is evident from the following: More than 75% of total sales by U.S. majority-owned foreign affiliates in China during 2003, the last year of available data, went to local markets. That was substantially above the global norm (64%). Less than 15% of U.S. foreign affiliate sales in China were for export to the U.S.

this is defianttly a recent phenomenon as firms stabilize operations in china, but it is defiantely the way of the future. Exports are getting more expensive, and thus firms are looking at the domestic market.  See posts  Are Trade Stats the Best Measure of Success?  to see the results of the 2006 AMCHAM business climate survey where they really started highlighting this trend

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Before taking off for holiday, I was passed the link to American and Chinese Attitudes Toward Each Other by Committee of 100.. and it is one of the best documents I have read all year. with 20 pages of Key Findings (PDF) (Full Report (PDF) is just under 90 pages), there is a lot to highlight… so I will not even try.

here are a few of the things they have chosen t highlight in their press release, but take the time to review all their charts…

Economics / Trade: Both sides see the most common interests lie in trade. Among Americans, trade is regarded as the most likely area of shared interests, yet it also ranks as the most likely source of conflict.

Product Safety: Favorability in the U.S. about China has fallen since 2005. This lower opinion of China might partly reflect recent media attention on the Chinese product safety issue. More than two-in-three Americans have reduced their confidence in Chinese-manufactured goods as a result of the food and toy contamination cases emigrating from China.

Environment / Climate Change: The survey also finds that majorities in both the U.S. and China – the world’s two largest producers of Greenhouse Gases that scientists believe are contributing to climate change – worry to some degree about global warming. The Chinese are more likely to be worried than the Americans. Americans rate both governments poorly on their respective performance in handling environmental issues. By contrast, the Chinese rate both governments positively.

Views on an Emerging China: As compared with C-100’s survey conducted in 2005, U.S. elite groups have largely shifted from thinking about China in terms of its government and more in terms of its emergence as a major actor on the global economic stage.

2008 Beijing Olympics: Both Americans and Chinese have very positive feelings about Beijing hosting the Games, agreeing that the Games will help improve China’s global image and economy.

Elites vs. General Public Views: Elites not only differ from the general public in both countries in terms of their views of the other nation, but also tend to misperceive the general public’s views of each other. For the U.S., elite groups underestimate the favorable views of China among the general public, while in China, elite groups overestimate the favorable views of the U.S. among the general public.

Download the Key Findings and enjoy. There are a bunch of WOWs in this document, and I think it has done an amazing job or really bringing to light jsut how far apart the U.S. and China are in terms of mindset… really. very interesting. Take lunch off and read this.

Just uploaded a few hours ago, Global Atlanta has just posted an excellent two part Youtube conversation between their reporter Trevor Williams and Alan Holmer on the current state of U.S. China relations, the role of SED (Strategic Economic Dialogue), and some of the issues they are addressing.

What surprised me a bit was the fact that Ambassador Holmer’s comments are very moderate and do not resemble some of the things that are quoted in the press by others on SED… additionally, it makes me wonder why if he as one of the top persons in the SED is so moderate, why the media angle is so harsh.

For example, one of the points I like the most was when he was describing the fact that the trade balance is (1) complicated, (2) something most people don’t understand, (3) the U.S. benefits from, and (4) includes a lot of “American Goods” in it.

One section that I would have liked to heard more on was his thoughts on consumerism. Personally, I think China’s converting savings into consumerism is a scary thing, and he seemed a little unwilling to just say that Americans have no savings… and are facing some really scary economic times.

At 20 minutes, you may want to refill your coffee, but I suggest watching in one sitting. the topics are very important, and anyone doing business in China (or affected by those doing business in China) should see just what is going through the minds of the people on the SED.

Part 1:

Part2:

In what appears to be a victory for the US side, the NY Times is reporting that China has agreed to remove a dozen subsidies on WTO disputed products.

In reading the article though, and then reading Susan Schwab’s notes in PDF here, it appears to me that the USTR is looking at this on a much wider level and may try to use this ruling to push harder for more removals.

According to Schwab, this victory is significant in three ways:

This outcome represents a victory for U.S. manufacturers, producers and their workers.

First, it eliminates a set of widely- available subsidies that create significant disadvantages for U.S. products across many manufacturing sectors.

Second, it shows that Chinese policymakers understand the need to respect the strict WTO prohibitions on these kinds of subsidies in the future. It also demonstrates that our two nations can work together to resolve major differences.

Third, it shows that President Bush’s approach to resolving trade disputes with China – dialogue if possible, legal action when necessary, and working within the rules-based system - gets real results.

Interesting that she thinks that, but I am still wondering what the wider victory is here. Obviously, there was a small battle won, but will this ruling have a real impact on a wider scale?

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Here is an excellent clip of Jim Jubak on some macroeconomic things to consider. you may remember that I covered a piece of his on logistics last year, and like that piece, he has some things that I agree and disagree with.

Currently working on a few posts to address some of the underlying issues he mentions, I done have time to do a full writeup at this point as I am in the middle of cutting a nightmare of a spreadsheet…

What I can say is that the questions he asks are ones that we are asking more and more in China. what happens if the US economy flushes itself like many (including myself) see happening. Is China strong enough? Some say china has decoupled (in part or whole), while others say if US goes down, so does China.

Anyway, watch this and let me know what you think. I will be back with more soon.

Update 1: be sure to read  Global Inflationary Pressures Likely If Yuan Unties From Dollar and China to Let Market Forces Weigh on Value of Yuan.  While not a direct tie into the above, some of the fundamentals discussed are very pertinent to the ongoing discussion

Anyone who has lived in China at any point in the last 10 years will attest to the growth of China’s east coast cities. For many who watched China’s rise, one of the most amazing measures was GDP growth, and the fact that China has been able to sustain double digit growth for so many years.

but has it? Or is China smaller than we have been lead to believe by various sources?

Well, if Albert Kiedel of Carnegie’s Endowment for International Peace has read an AD report right, China may actually be 40% smaller than previously thought.

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated.

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