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Monday, August 08, 2005


Mr. Econotarian

Regarding the potential end of cheap Chinese goods, do we really expect that improvements in China's economy will make the price of these goods rise, or is it safer to expect that either:

1) Chinese productivity will increase with larger capital investments in production, keeping prices the same or lower, or:

2) Other countries (Central American, African) with low labor costs will replace China in producing low-cost consumer goods?

New Economist

That is a very good question. I don't expect Chinese goods deflation to disappear overnight, which is why I dubbed it a "medium-terms risk". My concern is the complacency amongst financial markets that this can continue in perpetuity (look at long bonds), which clearly it won't. Services inflation in many OECD countries has not fallen much at all over the past five years.

The main risks I envisage to continued Chinese goods deflation are not low cost labour in Central America (too small) or Africa (too unskilled). Rather, the risks would seeem to come from disruption to production (internal strife) or trade (rising protectionism).

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