As China Purchasing Moves Up Who Buys The Goods?

China’s logistics office said that purchasing manufacturing rose once again in November. The index moved up from 54.7 in October to 55.2.

Analysts say that the improvement is a good sign for the economy of the People’s Republic, but many are concerned that the need for raw materials, among other things, will raise inflation. That may, in turn, cause Chinese banks to tighten their credit standards, which will decrease the availability of capital. The process could slow China’s growth, which may be to its  long-term advantage.

The more intriguing question is where Chinese manufactured goods will go in the future. Certainly, consumer activities in the US and Japan are weak. The crisis in Europe will be solved to some extent, if it can be at all, by a new level of austerity. That will depress consumer activity in that region as well.

Where will China sell the goods which are moving from its factories at such a plentiful pace? Some of the production may go to Chinese consumers. These consumers have shown a penchant to save rather than to buy. But, the numbers of the middle class have grown quickly on the Mainland, and the purchasing power of them as a group cannot be entirely discounted.

The other solution to the export problem that China faces is to drop the prices of goods that it exports. The country’s currency policy could help that. The undermining of foreign export prices from countries like the US will damage the economies of China’s trading partners so the cheap exports from the People’s Republic are at best a temporary solution.

China is also caught in the vise of an increase in wages and a need to keep the prices of its exports competitive. Factory workers have already begun to agitate for better wages. The central government supports this to some extent as a way to increase consumer demand within the country. But, it also will compress the margins of local manufacturers.

What is the ultimate answer to the question of where Chinese exports will go if its manufacturing pace continues at the current pace and the world economy remains weak? In many cases nowhere.

Douglas A. McIntyre