America: Wake up! How are we going to compete with China?

By Eric Jackson, Senior Contributor03/02/11 - 06:00 AM EST

Former GE(GE_) CEO, Jack Welch, was on CNBC Tuesday, saying, "This is still the best country in the world."

Those words make us all feel warm and fuzzy. We're the best. We have been and we always be. Politicians like to invoke these same feelings in their speeches.

But the words are hollow. We're not the best anymore. Our time at the top is coming to a close, unless we take drastic actions which we seem unwilling to consider. China is about to pass us. The Chinese work harder, for less money and benefits.

We need a wake-up call.

I had a long car ride last weekend and was listening toSirius(SIRI_) satellite radio with an endless loop onCNN and Fox News Channel. If you only got your news from these two channels and the politicians and pundits speaking on them, you would assume our leadership atop the global is unassailable.

The biggest question facing our country, according to the talking heads, is whether we should have more or less government and more or less taxes.

These debates miss the big picture: China is eating our lunch economically. Are we, as Americans, going to come together as a cohesive team and think about how we can better compete with the Chinese or are we going to keep fighting ourselves?

Americans have had it good for a long time. Our standard of living is the best in the world. We borrowed money over the last 20 years because our expectations of continued prosperity were assured. But the party is over. We've collectively maxed out our credit cards. It's time for us to look at ourselves critically in the mirror.

We don't need politicians who act like polite Saks(SKS_) sales clerks telling us that our butt doesn't look fat in a new pair of jeans we're trying on when it does. We need politicians who talk to us like a personal trainer at the gym: We're fat and out of shape --- and we need to get on a program.

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China's Complex Inflation Problem

By Eric Jackson, Senior Contributor02/24/11 - 06:00 AM EST

NEW YORK (TheStreet) -- The Chinese government and a chorus of US critics have criticizedFederal Reserve Chairman Ben S. Bernanke's "quantitative easing" (QE2) program since its announcement last November as a direct cause of white-hot commodity inflation.

According to this view, Bernanke unfairly unleashed inflationary forces which China and other countries have to grapple with.

Bernanke has correctly pointed out that China and others could very quickly lessen the effect of U.S. policy by de-pegging their currencies, like the yuan, to the U.S. dollar.

Hedge fund manager Paul Tudor Jones went so far recently in an investor letter as stating the U.S. should force a de-pegging, as it was adding an extra 4% to the U.S. unemployment rate.

In the letter, Tudor Jones discussed the downside to China of their "unsustainable" policy: "one way or the other, the real U.S. and Chinese exchange rate will find equilibrium -- either through nominal movement or through relative inflation rates." He would say we're seeing the latter today.

While I agree that de-pegging the yuan from the dollar would be the single most effective move the Chinese government could make to curb inflation in China, they are unlikely to do so. Even if they did, more action would be needed to quell it.

Over the last 10 years, especially since the 2008 crash, the Chinese government has taken several actions which, although correct at the time, have fanned the price of commodities more so than QE2. Such moves include:

• The 2008 stimulus package that pumped $584 billion into the Chinese economy. In 2010, China's M2 money supply rose 19.7% over the prior year. With money supply now at 73 trillion yuan, it is larger than China's GDP of 67.5 trillion . By comparison, the U.S. M2 as a percentage of GDP is close to 0.6. That will create some inflation.
• For many years, the Chinese government has artificially kept prices of electricity, water, and natural gas low through subsidies to promote economic development. Unfortunately, this has promoted waste by end users and was expensive to the government. Last year, they increased these prices to true market levels. This came as a shock to many and added to perceptions of greater inflation.
• To deal with an over-heated high- and middle-end housing problem in coastal cities last year, the Chinese government implemented a number of draconian macroeconomic policies. They've worked as hot money has been taken out of the housing sector. Yet, evidence existsthat speculation and hoarding has flowed into food items such as onions, beans, peanut oil, corn, ginger, apples, and sugar. Food CPI increased by almost 12% last year, which contributed to two-thirds of the overall increase in the Chinese CPI.
• The Chinese government has been trying to migrate the Chinese economy from one driven by foreign exports to domestic consumption. This is seen as more stable and less vulnerable to some foreign Lehman-like shock in the future.

  The government's efforts have been successful. Last year, Chinese consumer spending increased 18.4% to 154 trillion yuan from the prior year. Yet, such consumption doesn't occur without requiring more raw materials to build televisions and appliances. It's a big reason why -- in the last year -- cotton was up 88%, wheat 54%, sugar 38%, and copper 21%.

• The migration of many rural workers to bigger cities to pursue higher standards of living have resulted in stories of "empty villages" back in the country with insufficient labor to grow the needed crops. Lower agricultural demand in turn drives up prices. China has been a net importer of food for many years already. As purchasing power increases in the coming years, the Chinese desire to feed themselves a higher protein diet will further exacerbate prices.
• With an expectation that the yuan will need to be revalued upwards in the coming years and with China's relative outperformance in the global economy, hot money continues to flow into China . That creates additional inflationary pressures.

Beyond these factors, 2010 saw sand storms in Inner Mongolia, droughts in Southwest China, an earthquake in Central China, floods in Hainan Island, and drought, fires and floods in Russia and Pakistan. All these kept an upward pressure on Chinese commodity pricing.

So, while none of these actions by the Chinese government was wrong at the time, it's clear they now have a difficult balancing act of keeping their foot on the gas to drive economic growth will tamping down inflation.

Simply de-pegging the yuan from the dollar won't eliminate all inflationary forces bubbling at the moment. However, the Chinese government would benefit in the long run more from a more rapid increase in the valuation of the yuan than their current go-slow approach. There will continue to need to be increased interest rate and reserve requirement hikes to help moderate the economy.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Video: The Complex Roots of China's Inflation

Contributor Eric Jackson says China's inflation is white-hot and has more to do with past actions its own government has taken than Ben Bernanke's QE2. Swift action is needed this year by the Chinese government to get the problem under control

Thu 02/24/11 10:23 AM EST -- Eric Jackson

Stocks in this video: YUAN | USD | MACRO | FXI

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Notes From the Ground in China, Part II

By Eric Jackson

RealMoney Contributor
10/29/2010 7:30 AM EDT

Click here for more stories by Eric Jackson

It's been a week since I arrived in China. I have spent time in Shanghai, Beijing, Harbin and each city's suburbs, and this morning I was up in the countryside of Heilongjiang Province near the Russian border. I have had the chance to meet with company executives, workers, locals and government officials. I wanted to provide some commentary on some of the China-related topics that get a lot of coverage in the U.S. press, which I believe are important to consider when thinking about investing in a public company here.

Dollar-Yuan Rhetoric

We hear endless talk about whether and when the Chinese will revalue their currency, which is currently pegged at about 6.6 yuan per dollar. U.S. politicians keep saying it needs to go higher, although they never say what rate they would ultimately prefer. I've heard fund managers Jim Chanos and Hugh Hendry suggest the yuan would sink vs. the dollar if it were allowed to float, though I personally just don't follow their logic in that.

In any case, if the yuan were allowed to float, I'm sure it would rise against the buck, but I don't expect this to happen. No matter how many U.S. politicians talk about what China should do -- including members of the House of Representatives who seems have never gone to China, but have no problem spouting off policy prescriptions -- and no matter how many G8 countries engage in these same discussions, none of it will have any bearing on what Beijing does.

Think about how long this issue has been debated. In all that time, nothing substantive has happened. Moreover, try to put yourself in the shoes of the Chinese government. Why would you want to raise the value of the yuan? How does that help you and the Chinese people? Remember, China's goal -- kind of like that of the U.S. Federal Reserve -- is social stability, which means full employment and price stability.

Given the upcoming U.S. elections, a lot of theater is going on right now, and politicians are saying a lot of things so they can tell their constituents that they said a lot things. Don't expect the yuan to move much, if at all.

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You're the Yuan That I Want

By Eric Jackson
RealMoney Contributor
6/21/2010 9:00 AM EDT
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I have been bullish on China for some time. News over the weekend that Beijing was going to allow the yuan to float in some manner within the next year has been very positively received by the global equity markets. It's bullish for the Chinese economy, and global equities, but it's also very good news for Chinese equities. Here's why.

Although the United States has been bellyaching about the yuan's peg to the dollar for a long time, I actually expected no change in Chinese policy. After all, put yourself in China's shoes: Keeping the yuan tied to the dollar was continuing to support the growth of Chinese exporters globally. The Chinese government remembers well how quickly export demand dropped after Lehman Brothers failed. As a result, many factories went from running full tilt in China to laying off workers and lying dormant. Bustling barges in the Yangtze and Pearl Rivers, with incoming raw materials and outgoing exports, suddenly stopped.

It's because of this drying up of global demand that Beijing was forced to pump a $600 billion stimulus package into the Chinese economy to get the wheels turning to keep GDP ticking over at the pace it needs to support its growth and unemployment targets. Along with the stimulus, the Chinese government mandated the country's banks to push forward lending. It also accelerated a push to transition the overall economy from an export-driven one to a domestic- or consumer-driven one.

China is still dependent on exports and will remain so for several years to come. However, you would have to view its efforts to shift the country's economic emphasis so far as successful. It got the economy rolling again and, when foreign Cassandras started complaining there was a property bubble in the works, it preemptively pricked that bubble -- in about a month. All the most recent data out of the major Chinese cities suggest real estate has cooled, yet growth continues and inflation is tame.

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