Saturday, June 26, 2010

China's (Great?) Readjustment

ChinaStakes takes a big picture view of recent changes as executed by China and what it means:

A series of recent events, i.e. significant pay rises triggered by labor disputes in the Pearl River and Yangtze River Deltas, RMB appreciation from re-decoupling of the yuan to USD, the cancellation of 406 different export tax rebates, with particular influence on the steel industry, has posed significant questions for investors about what this means to the future Chinese economy. [...]

Chinese government began its economic restructuring, as lip services, in the 1990s, but external and internal imbalances intensified, caused by the factor pricing failure and the distorting macro-control. The nature of the market mechanism is in response to price signals. This time, changes in wages, exchange rates, and taxes show that the Chinese economy is undergoing a true transformation, which will also help China adjust both internal and external imbalances.

As far as investment is concerned, the near-future trend is from external demand to domestic demand, from manufacturing to services, from investment and exports to consumption, from cheap low-end products to quality brands. Companies able to manage this wave will grow rapidly, and finding and investing in such companies will create China's next wave of billionaires. China's largest wealth will increasingly turn into the ability rooted in this land, people, and systems.

Read the whole thing. Personally, I suspect that while these are significant policy changes, implementation will happen slowly lest they jeopardize economic growth. The message from China's government is however clear on the direction in which they want to lead their economy. It should also be clear that China intends to make changes at its own pace and its leaders will continue to act in their own interest.

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