What “Made in China” Means for America

The promise of Euro-bank re-capitalization kept the major U.S. indices up 2.5% all day yesterday. Also helping the good mood is Congress, believe it or not. Many feel that this group of do-nothing politicians is aware that people are plenty irritated. It’s hoped that their desperation will lead to a positive outcome for the jobs bill and free trade agreements with South Korea, Panama, and Colombia.

And we can only hope that the bill intended to slap some tariffs on Chinese goods never sees a vote. While there’s no doubt that the Chinese yuan is undervalued, it’s not likely a trade war with China will help. But it could hurt, as China is the third largest export market for the U.S.

A labor group called The Alliance for American Manufacturing says a 28.5% appreciation in the yuan would create 2.25 million American jobs and reduce the annual trade deficit by $190.5 billion. Sounds good. But a better way to improve the U.S. manufacturing sector is to give companies a reason to use it.

Take Wal-Mart (NYSE:WMT). No company is more associated with "Made in China" than Wal-Mart. And U.S. consumers certainly enjoy discount prices made possible by cheap emerging market labor. If costs rise in China, then Wal-Mart will get goods made in Vietnam, or Malaysia, or wherever.

The loss of the U.S. manufacturing sector is a function of wage arbitrage, made possible by technology and globalization. Tariffs aren’t going to change that.

Speaking of China, MarketWatch ran an ominous article about its housing market. And I quote:

Chinese house prices eased in September, the first such drop this year, while sales activity fell sharply in the Golden Week holiday last week, traditionally a peak period for property sales. Reports from the region citing data from the China Real Estate Index System showing house prices in 100 cities it tracks eased 0.03% during September. On a year-over year basis, however, new home prices were up 6.2% in September, compared a 6.9% rise in August, according to the index.

Meanwhile, Golden Week transactions were down sharply from a year earlier, according to the China Index Academy survey of 20 cities, cited in research by Bank of America Merrill Lynch. Sales fell 44% from a year earlier, while former real-estate hot spot Shenzhen saw activity drop plunge 90%, and Ningbo and Shanghai recorded year-on-year sales declines of 78% and 73%, respectively.

China’s attempts to cool inflation has focused on the real estate sector. Loan reserves requirements have been increased, as has the amount that buyers must put down to get a mortgage loan. Still inflation, and growth, have moderated only slightly.

As I’ve noted in the past, fears of a slowdown, and possible crash, for China’s economy is a subtext to the fear that investors have about Europe. But it could easily jump to the forefront, and could cause similar damage to the stock market.

In my opinion, this is a story to watch closely. The time to act may come. As a centralized economy, it’s more difficult to assess the risk in China’s economy.

In any event, earnings are the story for today. Given the recent rally, Alcoa (NYSE:AA) will need to come in strong to give us more upside.

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