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China imploding, but source of manufacturing FDI for Sri Lanka: Howard Nicholas

Mar 31, 2017 06:10 AM GMT+0530 | 2 Comment(s)

ECONOMYNEXT - China is imploding after a massive state intervention bout employing fiscal and monetary stimulus, which can drag down the rest of the world, but Sri Lanka can still benefit from Chinese manufacturing relocation, an economist said.

"What China did in 2015 was actually unbelievable," Howard Nicholas, from the Institute of Social Studies in the Netherlands, told an economic forum organised by Sri Lanka Inc, a think tank.

"China undertook the greatest fiscal expansion since the US injected vast amounts of money after the Second World War."

China's gross domestic production is now driving global growth, with East Asia being the global manufacturing hub, he said.

The US economy was weaker than statistics show, with gross domestic product growth exaggerated, and 'hedonistic' adjustments and unemployment understated.

High unemployment, which could be over 15 percent, and low wages had helped bring Trump to power, Nicholas said. Japan and Europe were also weak.

He said, contrary to official data, China was in recession, with negative growth rates according to alternative theories.

Nicholas says even the Chinese Prime Minister had publicly said that he does not believe in GDP data, but goes by electricity demand.

Imploding

"There are signs that the Chinese system is imploding as a result of what they did," Nicholas said, who studies business cycles.

A typical business or credit cycle starts with low interest rates, which build up into an inflationary asset-price bubble, and collapses and deflates with deleveraging, wiping out past excesses. Depending on how long low interest rates last, mal-investment and excess capacity will be greater.

China now has vast excess capacity, he said.

Other economists say China (which has a pegged rate with foreign reserves and not a floating rate with domestic assets) had precipitated balance of payments trouble and was sterilising interventions.

China had now started to hike rates after spending several hundred billion in forex reserves. Analysts who study pegs say such regimes have less room to print and perpetuate bubbles than floating exchange rates, as peg defence with falling forex reserves serves as a break.

Nicholas said central banks in advanced nations had printed trillions of dollars after 2008 - where there was a credit collapse and bank ran - but inflation had not moved much, except fire some speculative asset bubbles.

Economists with a classical bent say, when credit collapses (deleverages) and liquidity builds up in banks, monetary policy is not transmitted effectively (monetary policy impotence/liquidity trap) to create inflation. In the US, quantity easing mostly ended up in the Fed as unused excess liquidity.

The US was now also raising rates as the economy picked up and commodity prices also started to move up. Excess liquidity in the US fell by around half a trillion dollars since the first rate hike in late 2015.

Nicholas said the US may also be moving into more trouble.

"When one part of the world goes down, it all goes down," Nicholas said.

Sri Lanka will find it increasingly difficult to attract foreign investments in such a scenario, he said.

Chinese Relocation

But with China's wages rising, it was looking to invest outside, as Japan and Korea did in China at one time. Vietnam is now a key destination.

China was interested in relocating to the Philippines and South Asia, and Sri Lanka could benefit, Nicholas said. After a downturn in the US during the last century, many firms had relocated to Argentina and Brazil, he said.

"This is Sri Lanka's opportunity, because there are a large number of companies that are wanting re-locate production plants," he said.

"Chinese companies can benefit from World Trade Organization rules of origin if they relocate outside China. That is why South Asia is very attractive to them. Sri Lanka has to do something to attract Chinese companies."

China had already told Sri Lanka that they could relocate over 2,000 companies if they get Hambantota port and 15,000 acres of land. (Colombo/Mar30/2017 - Update II)


 

2 Comments

  1. Dilina April 03, 11:02 AM

    I very much agree with Rahula. I have similar fears on what type of industries or factories that are waiting to be relocated in Sri Lanka because that could bring numerous environmental and health issues to Lankans which must be shunned at any cost. It is surprising our myopic yahapalanaya political masters running behind a few dollars paying no attention to these most important factors which could have severe social and environmental ramifications for the Lankans. Do they not or do they pretend not see the air pollution in Beijing and big cities in China ?Resorting to getting rid of family silver for a pittance to foreign parties is another matter which is concerning. SAD state of affairs

  2. Rahula March 31, 10:47 AM

    This is nothing but a trojen horse. Why 2000 companies, why not 1998?, Sri Lanka has stricter polution standards than China so how would moving to the Jungle with no infratructure or labour be cost effective? Why not make this offer for Jaffna or Colombo that has available labour pool and infrastructure? Sri Lanka cannot absorb this production so why would these companies spend so much money to relocate? these are all lies. Its nothing but a land grab by China

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