In a wry twist of fate, we have a small maintenance project at work that’s been impacted by an international economic governance situation. At CIGI (The Centre for International Governance Innovation) we recently installed a TV Studio for doing live media hits. As part of the setup, we’re installing an upgrade to our security system. Although our security company is a local provider, the upgrade has been delayed by over a month due to a part that’s on back order – a part that isn’t available here or anywhere else in Canada. You see, this part is manufactured in China, and the manufacturer is holding back the order due to conflicts related to pricing negotiations (they want more money for the parts, and Canadian importers aren’t willing/able to pay for the increase). Although the obvious solution may be to buy the part elsewhere, in this situation (and others), China has become the world’s factory and the part can’t be found anywhere else.
In this case, the Chinese manufacturer is caught in the middle of many global economic forces, well beyond their control.
First, they are dealing with a 4.4% inflation rate that has been aggravated by China’s monetary policy. In order to help combat the global economic crisis, the Chinese government had to inject further cash into the economy, fueling inflation and the country’s rapid economic growth. This inflationary increase has to be either carried by the Chinese manufacturer, or passed on to their customers.
Next, they are dealing with currency policy issues. Normally, in a free market environment, China’s economic growth would be shared with the world by allowing the RMB to appreciate in global markets. China’s government has, however, been keeping the RMB pegged to the USD. With the RMB artifically depreciated on global markets, Chinese manufacturers have a competitive advantage. However, as the RMB appreciates, these same manufacturers are seeing their competitive advantages and profits dwindle, much like Canadian manufacturers did 2002. Since China’s currency policies are seen by many as an unfair subsidy to Chinese manufacturers (some go so far as calling them “predatory”), such manufacturers are worried about the future – if the Chinese government allows the RMB to appreciate quickly, they will need to quickly increase their prices to maintain profitability. Being a country of planners and savers, Chinese manufacturers are increasing prices now, both to deal with appreciation and to help plan for future increases.
Finally, with many of the G20 nations pressuring China to cool their exports and in this world of touch-and-go diplomacy, it’s a short jump to imagine a Chinese state department advising manufacturers to delay shipments a couple of months. This would move shipments out of the 2010 calendar year into early 2011, artifically decreasing China’s export numbers for 2010. This would allow China to point to reduced exports as a show of good-faith to G20 partners.
And so, amongst this turmoil, we find ourselves in a situation where international economic governance is impacting Chinese manufacturers:
- China’s monetary policy (injecting stimulus money) is aggravating inflation and thus prices
- RMB appreciation is forcing manufacturers to increase prices to maintain profitability
- Global calls to further appreciate the RMB may be encouraging Chinese manufacturers to raise prices further
- For policy reasons, manufacturers may be delaying shipments into 2011
All of this put together means that a specific Chinese manufacturer of a security system controller is playing hardball with importers and service companies here in Canada. So, even though CIGI actively studies and comment on China’s role in the global economy (examples here, here and here), we can’t complete a routine maintenance upgrade in our building here in Waterloo.
It’s funny how the world turns.