Executive Interviews: Interview with Kai-Alexander Schlevogt on The China Factor
January 2008
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By Dr. Nagendra V Chowdary
Dr.Kai Alexander Schlevogt Professor of international strategy leadership at the National University of Singapore Business School He serves as a Program Director of the Nestle Global Leadership Program delivered in association with London Business School.
Even if the net impact of this
redistribution from US exporters in
China to domestic producers in the
US on economic welfare is unclear,
the following negative consequence
will definitely prove highly
detrimental to the whole US
economy: Freed from the pressure to
keep its exchange rate low, the
Chinese government might stop
buying significant amounts of US
government debt. Interest rates in the
US would increase, which would
depress investment and growth. Incidentally, US politicians do not
enjoy much credibility if they claim
that they believe in free market forces,
since they adopt protectionist
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measures whenever they think this is
in the national interest. One example
is the protection of certain agricultural
produce.Interestingly, those who call
for currency appreciation instead of
simply demanding a flexible exchange
rate regime, where rates can go up and
down, unwittingly prove their dislike
for market forces. In fact, contrary to
what most pundits predict, the
Chinese Yuan might actually
depreciate if it is allowed to move
freely, in which case exports from the
US would become more expensive.
This might be the case if China allows
the Chinese public to freely invest
their funds abroad, increasing the
demand for foreign currency to buy
foreign assets. In this case, US
politicians, like Wolfgang Goethe's
sorcerer's apprentice, might not be
able to stop the spirits that they called! -
"China exports inflation." Your
comments please. On the one hand, China actually
helped citizens in developed
countries to enjoy the fortuitous
combination of low consumer price
inflation coupled with solid growth,
and in the US, low unemployment.
According to proponents of the
Phillips Curve, which shows that
employment is positively correlated
with inflation, this is impossible. But
cheap imports from China and
domestic wage restraint in the face of
the Chinese "reserve army" of laborers
kept consumer prices low.
Multinational companies that
invested in China sourced a large
amount of goods and services from
their home base and thus contributed
to GDP growth there. Besides, in the
US, low interest rates, which were
also "imported" from China, were
conducive to investment in capital
goods and housing, fueling GDP
growth, too. Due to continuing government
intervention, increased aggregate
demand did not lead to price
increases in the developed world,
because China kept its exchange rate
low. It prevented a decrease in
aggregate demand in developed countries, since given the weak
Chinese Yuan, net exports from China
remained strong. Unwittingly, China
paid dearly for literally "exporting"
low inflation. It bought large amounts
of low yielding US government bonds
to subdue its exchange rate. By doing
so, it incurred high opportunity costs
in terms of foregone higher yields
from alternative investments. Going
ahead, it plans to diversify its asset
holdings to some extent to improve
yields. On the other hand, the prices of
commodities as diverse as oil, steel
and milk rose dramatically. Yet in
industries such as packaged food, the
increased input costs were not fully
passed to consumers, since they could
be partly compensated by lowered
costs in other areas. The price hikes
were partly due to increased demand
from China, but it is not fair to assign
the full responsibility for them to the
Middle Kingdom. To start with,
demand from other countries also
rose. Besides, speculation explains
part of the price hikes. Commodities
were bought and, after prices
increased, sold without the physical
goods being moved. Further,
government intervention in some
developing countries led to
unintended consequences. For
example, in the wake of policies that
promoted renewable energy, more
agricultural fields were used to grow
crop that could be used as bio fuels.
Production of other agricultural
produce was cut back. It is not correct
to blame China for the price hikes that
resulted from this reallocation of
resources. Future changes in commodity
prices will depend on the quantity of
demand and supply, as well as their
price elasticity. For example, when
demand for milk increases
significantly, farmers may not be able
to increase supply immediately to
satisfy it. In this case, the supply curve
would be vertical. Prices would need
to go up for the market to clear. But
within a couple of years, farmers can
increase their life stock. Holding other
things constant, the increased supply
of milk would cool prices down.
When the relative price of renewable
energy decreases, consumers may
substitute it for fossil fuel. The decline
of demand for oil, ceteris paribus,
would dampen its price. Future changes in the Consumer
Price Index (CPI) depend on
movements in aggregate demand
reflecting changes in consumption,
investment, government expenditure
and net exports, as well as changes in
aggregate supply. Competitive
dynamics a function of industry
structure and company behavior
will determine to what extent
potential increases in commodity
prices are passed through the value
chain and thus indirectly affect
consumers. The direct impact of the
commodities on the CPI depends on
their weight in the consumer basket.
Even the combination of inflation and
recession so called stagflation is a
possibility. In this case, savings are
inflated away and income shrinks at
the same time. -
Do you think that the excitement
about China is a case of irrational
exuberance or overdue optimism? Leaders around the world must develop
a realistic view of the opportunities and
risks in China instead of being blinded
by excessive enthusiasm. I know many
CEOs who are just following the herd.
They get excited about the buzz about
China and do not want to go down in
their company's history as the leader
who missed the gold rush. Their
greatest concern is not to fail, but to fail
alone. Clearly, this is not a good reason
to invest in China, since the herd can be
wrong. It is equally dangerous to frame
China solely as a menace instead of
focusing primarily on the
opportunities. Numerous studies in
the field of psychology have shown
that so called threat bias often
prompts people to overcommit
resources. A clear sign of threat bias is
the fear of missing the "last" train,
such as obtaining a license, despite
the fact that in most cases new
attractive chances will emerge in the
future.
1.
Wal-Mart's Strategies in China Case Study
2. ICMR
Case Collection
3.
Case Study Volumes
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