CHINA AND HIGH ORDER CAPITAL GOODS

Posted December 3, 2008

Today, China is massively closing factories.  High order capital good (HOCG) producers always suffer more than Low order consumer goods (LOCG ) producers. Because of decreasing exports to the USA and Europe, Chinese unemployment is rising dramatically and many return to the countryside to work on the farms.

Globalization, Greed and Outsourcing proves to be nothing more than a huge trap.

Western entrepreneurs have over the past years with the invisible assistance of local authorities and misallocation of funds (low interest rates), moved the bulk of the production of consumption goods to the East (China and India).

There were thousands of reasons and hidden incentives for moving the production abroad: cheap labor, lower costs, less taxation, no environmental rules, cheap energy and transportation, the absence of a suffocating legislation. Last but not least, payment could be done using worthless paper money which was subsequently even re-invested in the US and the EU.

The goods which were produced abroad needed only to be imported and distributed locally. The same applies to many agricultural products. Especially true for the USA. Whilst the manufacturing process was exported, the Western world muted into a ‘Service Society’.

Goods produced in the Far East are imported and consumed by the West. As the Chinese production cost of the goods is lower than the cost would be in the Western world, the nominal profits are larger and the profit taxation is added to the Western import duties and local sales taxes. The end result offers huge income benefits both for the Western Authorities and the multi-nationals (Globalism) with have since the very beginning sold this idea as a Win-win situation.

The trick however is that the Chinese are paid with worthless Fiat paper money which is partly reinvested in the West and helps to keep interest rates low and consumption high.

The West however has overlooked something extremely important. In order to produce these cheap goods, factories had to be built. Machinery had to be installed and local labor force trained.

West and East lived this win-win situation for many years. Every body lived happy and each time Western demand started to fail and the fairy tale was fading away, fresh money was printed and injected into the economy. 

One thing however was overlooked. Money can be printed with no limits but there is a limit on consumption and a more dramatic limit on the quantity of credit and debt. People can only indebt themselves up to a certain point. Pass this limit and they can no more honor it. This is where the Real Estate markets started to collapse months ago.

As a result of the Crisis Western consumption is falling, imports declining and Chinese see exports and local production decrease (Von Mises) exponentially. Chinese factories are closing down. Unemployment is rising dramatically. This creates a huge problem as no previsions have been made for the local work force which are now massively loosing their jobs and income by the thousands.

Chinese goods were paid for with worthless fiat paper money but there is no way to move unproductive factories and all machinery out of the country.They have been sealed with Chinese concrete on Chinese soil. Over the past years, Chinese have learned to operate the machinery and to run the factories is a productive way.

Today because of the danger for domestic riots, the Chinese authorities are - as expected - blackmailing the foreign owners to provide an unemployment compensation. If not, they will simply confiscate the factories and the machinery.

China is very afraid of one thing and one thing only, and that is if millions of migrant workers in the big cities like Shenzhen, Beijing and Southern China will riot, like they already are recently, with China seeing 100,000 factories close by the end of this year. And then the workers are not paid the months of back pay they are owed, and big riots occur. There are something like 130 million ‘migrant’ factory workers alone in China, who moved from the rural areas to the big manufacturing cities, and who are not registered as residents of those cities. Many of them are now living under bridges in those cities, and that is scaring the hell out of those local governments.