If you listen to President Trump, the US has stalled the Chinese manufacturing machine because of tariffs and shifting jobs from China to the US. If you examine reality, something else is going on.
In an article from Keith Bradsher of the New York Times News Service, the manufacturing sector of China has come roaring back.
The question is why? China does have a low cost, skilled labor and a very efficient infrastructure system which is very hard to overcome. The secret sauce has been the banking sector. The biggest banks are state-controlled and they have been offering extra loans to cope with the pandemic.
The Chinese government through the banks offered companies extra loans even if the companies did not need it as well as the government issued partial rebates on taxes and other government mandated taxes that together exceed 3% of the company’s sales. The government want to ensure good companies did not fail because of needing a bit of cash.
If you consider what families across the US and Europe working from home, their entertainment and travel budgets went to improvements of the house. Whether that was computing screens, stereo systems, power tools and home saunas. All of which are made in China.
In the article, the stereo system Trueanalog President Philip Richardson said China has the largest supply system of the parts you need to make a speaker, and China has the most stable, affordable labor force. Why would he move operations out of China?
In terms of the Chinese Yuan, the currency has remained weak relative to the Euro and US dollar. Foreign economists believe the state banks were selling Yuan and buying dollars or euros to prop up their currencies. The government says they are committed to maintaining a most stable value for the currency.
Linking to dividend paying stocks, no company exists in isolation. The manufacturing plant opens up but it needs parts to put together or a supply system. It is possible to make every part yourself but most companies as they grow in size and need to have lower costs find it is best to outsource your parts. An ecosystem of suppliers builds up and as long as the manufacturing company is successful, all will be good. As sales go, will the suppliers stay with the lone company or want diversification? Time will tell but some diversification is better than none. As you make your investments, look at the supply system and logistics to help understand the long term potential for success.
There are more questions than answers, till the next time – to raising questions.