– Wei Gu is a Reuters columnist. The opinions expressed are her own –

While China has been outspoken in expressing concern about the United States printing too much money, those worries might be better focused at home. No country beats China when it comes to effective monetary easing.

Beijing has scrapped lending quotas, adopted a loose monetary policy and kept interest rates at a four-year low to boost liquidity and promote growth. The policy has worked. China has lent out more money in the first four months of this year than the whole of 2008. Money growth in China is up more than 25 percent this year, versus about 10 percent in the United States.  Click here for a related graph.

Beijing’s “monetary emissions” will have major consequences, and China might suffer from inflation before other countries in the world. The flood of liquidity that has been injected will almost certainly overwhelm the country’s seemingly indestructible overcapacity. History has shown that China can have inflation even during times of severe overcapacity, such as in 2008.

So far, China remains in a honeymoon period. Cheap money is sloshing about but thus far it has only generated asset price inflation — the sort of inflation that investors like. Meanwhile consumer prices are still falling — by 1.4 percent in June versus the same period last year. Factory gate prices were down 7.2 percent.

These price declines must be seen in context. They reflect a high base of comparison last year, showing China needs to worry more about inflation than deflation. Chinese policy makers might have misread the symptoms — the big drop in manufacturing activity late last year has been exaggerated by a sharp destocking process, which means end demand did not fall as much as the authorities thought.

Beijing has prescribed a strong remedy in flooding the market with liquidity. And businesses, banks and local governments are only too happy to swallow it, for commercial as well as political reasons. Banks make money when they lend, businesses like cheap money, and local government officials get promoted when local economies perform well.

As one might imagine, equity prices have been the first to respond to this liquidity injection. Chinese stocks  have been a top performer this year, up some 63 percent, while the Dow is down 3 percent over the same period.

Next in line is the property market. House prices in America are still falling, but in Chinese cities such as Shenzhen and Shanghai, they have risen by up 20 percent since April. Long queues increasingly form when new apartments go on sale, and the government is talking about increasing the supply to help cool the market.

BLAME THE PIG

It will not be long before asset price inflation starts to infect the real economy. People buy televisions and refrigerators to go with their new apartments and a buoyant stock market prompts investors to order shark fins and hairy crabs for lunch.

In China, the first signs of real economy inflation will almost certainly be seen in pork prices. Over the past decade, pork prices have acted like a coal mine canary in predicting inflation. In 2004 and 2007, inflationary bursts were preceded by spikes in pork prices.

A jump in pork prices in 2007 and 2008 prompted the authorities to introduce new incentives to promote pig farming, which increased supply. As a result, pork prices have dropped by 39 percent from the high seen in early 2008. Pig farming has become unprofitable and farmers have cut hog numbers as a result. This simply paves the way for another round of pork price increases. Click here for a related graph.

It will only be a matter of time before inflation is transmitted to the country’s factories. After sharp de-stocking during the last quarter of 2008, Chinese companies have started restocking in anticipation of higher commodity prices later this year, which in turn has helped drive global commodities higher.

The price of some manufactured goods such as clothing and toys has already risen as the export slump forced thousands of factories to close, causing supply to drop more than demand.

When inflation reaches consumers and factories, policy makers will start to raise interest rates again. Asset prices might then experience a last round of euphoria as a wider spread between domestic and international interest rates attracts foreign inflows. But higher interest rates will reduce corporate earnings and home buyers’ spending power, and asset prices might start to fall.

Inflation is always and everywhere a monetary phenomenon, as monetarists like to say. China is on a money-go-round ride that can only end with higher prices. Watch out for the next export from China — inflation.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

Abundant liquidity, government support and a strong yuan fueled Chinese companies’ overseas buying spree.

But since they went out at the peak of the market and did not have a clear strategy for acquisitions, it should come as no surprise that most of those deals have turned sour. Once bitten, twice shy.

Crisis-ridden companies around the world are hoping that cash-rich Chinese buyers will come to their rescue, but the Chinese are not eager after getting their fingers burnt.

Chinese regulators are now giving more scrutiny to foreign deals, forcing interested buyers to lay out the most pessimistic scenario when seeking their approval.

Bankers said Beijing is skeptical about buying everything except resources, which is seen as important to China’s strategic interest and involves few integration challenges.

BUYING THE BRAND

Chinese manufacturers thought they had found a winning strategy by making goods cheaply in China and slapping a prestigious Western brand on it.

But the strategy hit a wall as companies such as TCL struggled for years to turn around businesses it bought in North America and Europe.

Lenovo’s purchase of IBM’s PC unit was widely lauded as a rare success until it announced a broad restructuring and profit shortfall earlier this month.

The acquired unit has a high exposure to large enterprises in developed markets, a segment that was hit hardest by the economic downturn, said Xin Zhao, an analyst at Cazenove.

“Before China caught the globalization wave our teachers in the West ran into problems,” said Yang Mianmian, president of China’s electronic appliance giant Haier, which last year spurned an offer to buy GE’s electronics unit.

“The financial crisis has changed our thinking and now we are looking more at rural demand.”

One of the potential pitfalls has been overpaying. Chinese buyers lack experience in valuation methodology and are at risk of paying too much. Moreover, they often do not have a strong understanding of the target experience, and tend to underestimate culture differences and powerful unions.

Some deals have not only incurred hefty losses but turned into a public relations nightmare as the crisis bites harder.

Take the example of Ssangyong Motor Co, South Korea’s No. 5 automaker, which filed for bankruptcy on Jan. 9 after getting hit by the global slump in car sales.

Analysts reckon SAIC Motor Corp, which owns 51 percent of Ssangyong, would be prepared to let the sport utility vehicle maker fail.

Some South Korean media have accused SAIC of all along planning to strip Ssangyong’s technology and dump it afterwards.

“Chinese companies have now realized there are many pitfalls on the road abroad and are learning from their experience,” said David Yu, partner at Llinks Law Offices, who advised SAIC on the deal.

FINANCIALLY SOUND

Chinese companies are financially sound — three state-owned banks trail only Warren Buffett’s Berkshire Hathaway on the global cash-rich groups list. But they’d better not try to bottom fish now.
The temptations are great — many Western brands long seen as out of Beijing’s reach are now fighting for Chinese attention.

Ford, for example, is looking for buyers to take up Volvo and a bank representing it has pitched it to at least three Chinese automakers.

“Chinese automakers need to be extremely cautious about those seemingly once-in-100-years opportunities to avoid failures which will not be recovered in many decades,” said Yankun Hou, an analyst with Nomura Securities.

To avoid more big losses, Chinese companies should cut their teeth on smaller deals in growing industries and markets, mindful that acquiring technology is much easier to manage than buying brands because it doesn’t involve taking over the whole operation.

“It is not clear that all the bad news is yet out, so assessing a target bank’s exposure is still challenging for any investor,” said Holger Michaelis, a partner with The Boston Consulting Group in Beijing.

“The timing however appears good for screening potential targets, but with a focus on smaller deals in less risky segments, like wealth management and asset management.”

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

– Scott Paul is executive director of the Alliance for American Manufacturing (AAM), a labor-management partnership of several leading U.S. manufacturers and the United Steelworkers. The views expressed are his own. —

Barack Obama knows the story of American manufacturing firsthand. He cut his political teeth as a community organizer on the South Side of Chicago in the shadow of shuttered steel mills, working to salvage hopes and dreams that had been crushed by the weight of layoffs and economic decline. As President, he can authoritatively recall America’s industrial heritage and decline, but more importantly, Obama can lead the nation to a renaissance in American manufacturing.

Manufacturing has boosted the American economy, jobs, and wages for generations dating back to World War II. Recently, it has fallen on very hard times. Nearly one in four manufacturing jobs has vanished since 2000, and 40,000 factories have closed since 1998. Last year, manufacturing accounted for nearly a third of all lost jobs in the U.S., while factory orders plummeted to record lows.

The health of manufacturing is important even for those who do not hold factory jobs. That is because manufacturing jobs pay better wages than other forms of employment—twenty percent above the U.S. average. Manufacturing jobs also have a stronger multiplier effect—supporting as many as five other jobs—thus contributing disproportionately to the economy. Manufacturers are large local taxpayers, supporting vital public services and schools in communities across the nation. American manufactured products tend to have a much smaller pollution footprint than Chinese products, and we are already deploying new technologies to compete in the clean energy economy of tomorrow. Finally, our national security depends on a strong defense industrial base to supply our troops and protect our interests.

If the creative destruction of capitalism and the arc of history were responsible for American manufacturing’s steep decline, there would be a legitimate debate about whether or not it is worth saving. But public policies have contributed tremendously to the predicament we now face; smarter public policies can get us on the path to recovery.

Wall Street’s woes and the collapse of the housing bubble bear some responsibility for manufacturing’s current condition. Credit markets and consumer demand have dried up, idling factories all over the nation. A substantial, strategic, and sustained economic stimulus package is needed for the overall health of the economy, as well as to boost manufacturing.

The stimulus should focus on investments in infrastructure such as mass transit, a smart energy grid, roads and bridges, which not only provide the greatest return on investment for American taxpayers by generating more jobs and economic growth than any type of tax cut, but will also make us more competitive in the long run. A sizable stimulus that includes a $148 billion annual new infrastructure investment can create up to 2.6 million jobs, including more than 252,000 in manufacturing. But manufacturing job gains are reduced by one-third unless all infrastructure materials are sourced domestically.

Dramatically reducing America’s trade deficit—which stood at a record $700 billion in 2007—will also boost manufacturing. American workers and companies often face global competition subsidized by governments, as well as violations of intellectual property, disregard of reasonable labor laws, and non-enforcement of environmental regulations. Governments such as China’s artificially lower the value of their currencies to gain a trade advantage. Simply enforcing domestic and international trade laws designed to ensure a level playing field, while ending subsidies and currency misalignment will boost our exports, reduce our trade deficit, and create jobs.

If Obama delivers on a manufacturing agenda, every American will benefit. He will also offer a new generation of Americans the same opportunity as their parents and grandparents had: to achieve the American Dream and join the ranks of the middle class.

– John Kemp is a Reuters columnist. The views expressed are his own –

The global slowdown is hitting China’s modern manufacturing base in Guangdong province especially hard. Deputy governor Huang Longyun on Thursday warned a news conference “the situation is grim” and the manufacturing hub around Pearl River Delta is bearing the brunt of China’s slowdown.

Guangdong’s burgeoning factories have supplied most of the cheap manufactured items flooding world markets in the last five years. They have also been the source of most of the marginal demand for crude oil, refined products and other raw materials. The province’s slowdown will therefore have profound effects on global markets and prices in 2009.

More than any other province, Guangdong has been a showcase for modernization and an export-led growth and development strategy. Its modern export-oriented factories, many organized as joint ventures with foreign companies, have given it some of the fastest growth rates in China.

Guangdong has consistently outperformed traditional industrial centres in the north-east around Heilongjiang, Jilin, Liaoning and Shandong. Central government leaders have urged the north-eastern provinces to follow the south’s strategy: reform struggling industries focused on producing industrial materials and low value items for the domestic market, and re-orient them towards producing lighter, higher-value industrial products for export.

But the reliance on exports that powered Guangdong’s transformation over the last decade and made it the new “workshop of the world” have left it more vulnerable than any other of China’s regions to the global slump.

According to deputy governor Huang, Guangdong’s output growth has already fallen from 14.7 percent in 2007 to just 10.1 percent in 2008. It could tumble as low as 7 percent this year, according to an economist with the province’s Academy of Social Sciences,less than half the thirty-year average. Growth in exports has slowed from 22.3 percent in 2007 to just 5.6 percent in 2008.

The slump may be hitting the formerly fast-growing provinces along the southern and eastern coasts disproportionately hard, while the north-east experiences a much milder slowdown. If this is confirmed, it would reverse the traditional pattern of growth and social development that has characterized China since the country began to open up in the early 1980s.

A VICTIM OF ITS SUCCESS

In some ways, Guangdong has fallen victim to its own success. Deregulation policies pioneered in the Shenzhen special economic zone have spread out to the rest of the Pearl River Delta and the wider region, making it the most liberalized and dynamic part of China’s economy.

The province’s manufacturers have responded by unleashing a torrent of exports onto global markets. While some of these items have been fairly high-value added items such as semiconductor chips, made in foreign-invested factories with high technology, most have been much more basic plastics, semi-fabricated construction materials and cheap bulk goods.

The export flood has stoked tensions with foreign governments, as overseas producers complain about the phenomenal surge in low-cost products onto world markets.

It has also strained the capacity of the region’s power generation and distribution systems to the limit, particularly in the summer months, when rapidly expanding manufacturing activity competes directly with peak demand from air conditioners in homes, schools and offices.

Finally, huge demand for labor has sucked in millions of migrant laborers, putting upward pressure on wage rates and real estate prices. Guangdong’s super-heated economy has suffered some of the worst inflation rates in the country, losing industry to cheaper locations inland or in Vietnam to the south.

Guangdong is a microcosm of wider problems in China’s economy. The flood of cheap manufactured items onto the world economy has depressed global prices and revenues from them, while the huge quantities of energy and other raw materials needed to make them, and which China has to import, have sent global oil prices and other commodities soaring.

In effect, rapid industrialisation has shifted the terms of trade against China. Guangdong’s huge export base with its voracious demand for power and other raw materials lies at the heart of China’s trade problems, as well as global pricing trends over the past decade.

The central government has responded by making the province a test-case for shifting China’s export base up the value chain towards more value-added and less energy intensive products.

Under central direction, the provincial government has been raising industrial power prices and curbing supplies to energy intensive users in the summer months, allowing wage rates to rise, and encouraging businesses to shift their output to higher value-added items.

The problem is that this shift may have come at the wrong moment. The rising value of the RMB against the dollar and other major currencies, coupled with rising local wage rates, was already adversely affecting the competitiveness of local manufacturers.

Even before the downturn intensified in September, there were widespread reports of business closures and relocations. Now that export markets have started to shrink, the pressures are set to become intense.

IMPACT ON GLOBAL PRICES

The province’s slowdown is set to have dramatic effects on global pricing:

(1) China’s northern industrial base is powered by domestically produced coal, but the southern and eastern coastal provinces rely heavily on hydroelectric resources, as well as imported fuel oil and diesel to meet peak summer demand.

Guangdong’s thirst for power over the summer has provided much of the marginal demand in global markets for fuel oil and diesel over the last five years. The province is a major buyer during the later winter and early spring months, as it attempts to stockpile fuel. But as growth slows and power demand falls, the province is likely to emerge as a much smaller purchaser in spring 2009.

(2) Guangdong’s rapid growth has also provided much of the marginal demand for a whole host of other raw materials, ranging from tin and lead to rubber and plastics. In some sense, Guangdong has been the key “load centre” in most global commodity markets. If growth there is now slowing sharply, and output in some industries is beginning to fall, it will cut global consumption for a broad swath of commodities in 2009 and keep prices under pressure.

(3) On the positive side, slower growth will ease pressure on China’s electricity grid. Even before the onset of the economic crisis, power availability was improving owing to the completion of the Three Gorges dam and the installation of the last of the massive generating turbines at Sandouping.

During the autumn, the reservoir administration began raising the water level behind the dam towards the target of 175 metres. A record volume of water is now being held in the major hydro reservoirs on the Changjiang (Yangtze) river and its tributaries. But with the crisis, the risk of summer power shortages next year, already falling, has now disappeared.

Crucially, the slowdown in Guangdong and elsewhere along the east coast should remove the threat of regional power shortages until the government-owned State Grid Corporation of China (SGCC) can open new long-distance ultra-high voltage (UHV) transmission lines in 2010 and 2011.

The new UHV lines are the first of 10 which SGCC plans to bring into service by 2015, bringing power from massive new hydroelectric projects in the south-western provinces of Yunnan and Sichuan to relieve power shortages in Shanghai, Guangdong and other fast-growing industrial load centers along the eastern and southern coasts.

Until the onset of the downturn, it seemed likely southern China would suffer an acute “power gap” in 2009 and 2010 before these lines became operational, with widespread shortages and rationing. The slowdown means that gap has now disappeared and with it the need to enter world markets for large volumes of diesel and fuel oil.

For previous columns by John Kemp, click here.