2010 – A Year Full of Surprises

This year is likely to be a year of surprises. Global growth will disappoint and the intrusion of governments into all matters financial, economic and even personal is a cause for uncertainty associated with policy risks. Markets hate uncertainty.

This is also a year when many countries from the US to the UK to China will experience the first moves towards policy tightening and the gradual withdrawal of financial and monetary stimulus. Moves by China to begin tightening monetary policy started, even though they are only tinkering with the problem of excess liquidity. The consequences of this tightening are not yet visible, but could well become far reaching.

What has been experienced on the ground by exporting companies has been an increase in wages because of a shortage of skilled workers. Many never returned to their factories after last year’s Chinese New Year and this sort of rate is probably indicative across many coastal exporting companies. Jiangsu province raised its monthly minimum wage by 13% to RM960. Wages for skilled workers are rising far more.

The plight of exporting companies has consequences too for the RMB. China is under pressure to revalue its currency and exporters will suffer from severe margin pressures. Beijing will resist foreign pressure to revalue its currency – the earliest would be the second half of this year. I have seen bunched up orders and across many manufacturing sector in Asia business has been boosted by the need to replenish inventory within the supplier chain.

Economic success is breeding arrogance in China and it has become far more assertive, stretching from US arms sales to Taiwan, to the dispute borders between India and China to its ‘obstreperous stance it took in the Copenhagen climate change conference last December’.

Trade will continue to be the central issue and the trend is now towards manufacturing being based close to points of final consumption rather than in some distant country or region like China and Asia. This is both a political and economic conclusion. Par of this coming revolution will surely be to bring back within American borders much of manufacturing capacity and Government has begun this process by wielding a stick, threatening to curtail many of the financial benefits and tax breaks that US companies currently enjoy from their offshore operations. The next stage will be to offer the carrot – by granting tax and other incentives for US multinationals to make that move.

By then, the competition will not be just by price, but competition by quality and design which will allow American to re-emerge as a dynamic economic power sometime by end of the 2010s.