Category Archives: Economy

U.S. Nuts…The Chinese Want Them

In the grand finale of blog posts on this site (for this course term at least), I have decided to take a light-hearted approach to the serious topic I have been commenting on for the past few months.

In a recent Wall Street Journal article titled “Shell Shock: China Demand Reshapes U.S. Pecan Business”, the recent phenomenon of Chinese increased demand for pecans was discussed.

 Pecans are as all-American as anything can be. Washington and Jefferson grew them. They are the state nut of Arkansas, Alabama and Texas. The U.S. grows about two-thirds of the world’s pecans and chews most of them itself.

For generations, pecan prices have fallen with bumper crops and soared with lousy ones. But lately, they’ve only been going up. A pound of pecans in the shell fetched $2.14 on average last year, according to the U.S Department of Agriculture, nearly double what they brought three years earlier.

The reason: The Chinese want our nuts.

Quite honestly when I was reading this article I burst out laughing. Although there is nothing odd about the article, I found the WSJ’s play on words for “the reason” to be quite funny.

All jokes aside however the article was actually very interesting from an economic perspective. Five years ago in China, almonds were considered the preferred nut. However after a string of advertisements in China, claiming that pecans resulted in better health and a longer life, demand immediately spiked for the pecans.  Why this is so intriguing is how it has affected the landscape of the pecan industry. Prices have been driven up rapidly wherever one is trying to purchase the nut, which makes sense from a supply/demand perspective. The supply of pecans has not changed, but the number of people that want increased vastly. Thus, prices rose accordingly.

In the U.S., pecan orchards have seen land values increase as a result of the heightened demand for the nut. While five years ago the orchards typically cost between $3000-$3800 dollars per acre, today they cost between $4500 and $6000 an acre. Pretty big jump I would say.

All in all I actually really like looking at this article because its not terribly serious, but highlights the main idea of my blog: globalization and its inescapable reality. Whether we are looking at policies on education, free speech, or simply changes in pecan consumption, it is clear that actions undertaken by China will affect the U.S., and vice-versa. This leads me to conclude by saying…keep a heads up as to how these countries make decisions; whatever it is they do will undoubtedly impact the other.

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Filed under Cultural, Economy

Tip of the Iceberg?

In an interesting turn of events, Brazil has passed China as the number one destination for private equity investments. In the economic and political realm this is an important occurrence as it is evidence of many of the different topics I have previously discussed in regards to China. This includes potential political instability, an economy stifled by restrictions, and consistent issues with human rights.

Brazil is less competitive and is perceived as having little or no political risk.

-Sarah Alexander, CEO/President of Emerging Market Private Equity Association

Is this the most significant thing to ever happen? Certainly not. However, it shows that the world is apprehensive about China’s future. Private Equity is a form of investment in which the investor gives money to a company and in return gains a significant portion of said company. What is important to note here is the aspect of ownership, and that as China’s fall in the rankings is evident of people’s decreased willingness to take ownership of a Chinese entity do to uncertainty. 24% of private equity investors cited political risk as a factor deterring their investment in China whereas in Brazil only 3% voiced this concern.

Do not get me wrong however—China is still number two in the world and is regarded by many as a highly attractive investment opportunity. The growth potential is tremendous as is shown by its 9.7% growth rate this previous quarter, and opportunities are present.

As I previously noted what interests me most about the change is the actual change itself. In some of my older posts I discussed the fact that at some point in the near future I thought signs of instability in China would emerge. This may not be a massive situation, however it is indicative of the larger issue at hand: people are skeptical of China because of the way it operates. I firmly believe that it is only a matter of time before we see some massive changes.

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Filed under Economy, Politics

Background on Chinese Currency Debate

One of the consistently hot topics between China and the U.S. when it comes to the economy is that of the Yuan, the Chinese currency (also known as the renminbi). The country’s currency policy is a frequent topic in the news and a disputed one at that, so in this post I will briefly overview some of the issues at hand.

Modernized countries, such as the U.S., Japan, England, Germany, etc., operate on a “floating” exchange rate system. What this means is that their currencies, such as the dollar, fluctuate in value based off demand. So as more people view the dollar to be valuable and thus want to hold it, its price rises accordingly. On the flip side, if people do not think favorably of the dollar, its price falls. It’s “floating” in the sense that its prices are dictated by the market.

China’s currency in contrast is “fixed”, or in economic terms, “pegged.” This means that policy makers set a certain value for the Yuan, giving it no flexibility in regards to pricing. When pegged, the value of a currency is set in relation to a stronger, more stable currency. Pegging countries, which are typically modernizing nations, often turn to the dollar as a counterpart. China has done this since the early 1980’s, and which has allowed the country to experience controllable economic growth. Pegging one’s currency affords a great deal of control over an economy as it allows set prices, thus ruling out the possibility of excessive inflation that sometimes accompanies rapid growth.

For the entire duration of its relationship with the dollar, the Yuan has been set at a very low price. Thus, Chinese goods are relatively inexpensive for individuals using the dollar. This explains why 1/3 of all Chinese exports go to the U.S. On the other hand, although it is cheap for to buy Chinese goods with the dollar, it is extremely expensive to buy dollar-based goods with the Yuan. It is no surprise that Chinese imports are very low for a country of their size.

Having a general understanding of how different currency systems operate is key to grasping the main arguments both for and against the pegged Yuan. In the eyes of Americans, there are two approaches. First, many believe no problem exist since buying Chinese goods is so cheap. Taking a different point of view, many individuals, like American policy makers, believe Chinese goods are so cheap it hurts American producers. They claim it creates an uncompetitive environment since the prices are too low to compete with. The Chinese argue that they must keep their currency fixed at current levels so that they may have firm control over stability in the marketplace. There really is no right or wrong answer. It just depends on which position you take as a viewpoint. American product makers feel it’s unfair that China keeps prices artificially low, whereas other American companies love the fact they can buy their materials on the cheap.

In June 2010, China allowed their currency to float a little bit off of its fixed rate. Many American policy makers saw this seen as a step in the right direction, however much fluctuation still needs to happen. Currently, one U.S. dollar is worth 6.5689 Chinese Yuan, and the Chinese government has remained steadfast in claiming that they do not plan on changing their policies on currency anytime soon.

As the globalization discussions continue in regards to the U.S. and China, currency is certainly something to watch.

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Filed under Economy

Innovation Deprivation?

“We need to out-innovate, out-educate and out-build the rest of the world.”

-U.S. President Barack Obama during 2011 State of the Union

In the eyes of many including Barack Obama, the U.S is facing serious issues. The economy is unstable, healthcare reform is troublesome, and of course, international politics are not so simple. (See the Middle East) However, while elaborating on all these things in his recent State of the Union speech, President Obama spent serious time discussing a different crisis; a decline in American innovation. Why does this scare him, and so many people others around the United States? Because to those individuals, a lack of U.S. innovation signals a greater problem—lost ground to China, the United States’ top competitor. There is no doubt that the U.S. should forge ahead with programs to boost innovation capabilities, however is it time to panic just yet?

The real answer is no. The U.S. is the world’s leader in education, business, human rights, as well as several other important domains. Take Duke University for example: It is home to a host of students from different ethnicities and nationalities. Duke produces leaders in wide variety of realms, and affords its students a top-notch education. Duke demonstrates the United States’ strength in that it is one of several institutions that operate at this high level.  According to a US News and World Report, 31 of the top 100 universities in the world are located in the U.S. whereas China only has 2. In regards to lost innovation in business, if one simply reflects back to U.S. accomplishments over the past 10 years, it is clear that there is no deprivation of creativity. Facebook, twitter, and Google are the products of American individuals and companies, and they are just a few of the several companies that have been immensely successful and changed the quality of life. China, although creating ingenious products like the Toyota Prius, has not experienced the same success. Lastly, China cannot compare to the U.S. to cultural acceptance and human rights. The easiest way to illustrate this is through the fact that in 1989 the events at Tiananmen Square occurred, but still to this day, Chinese individuals do not have access to information regarding what happened. Their Internet is censored, and their ability to search freely, and voice your opinion is heavily limited. In the U.S., freedom of speech and ability to browse is practically a given.

Do not take everything said to mean that U.S. does not have several things to address. Although both citizens of the U.S. as well as the government need not to panic, there is validity in the claim that heavy emphasis should be placed on growing innovative capabilities within the states. China has rolled out a program that includes both big investments in national industries as well as patent laws that favor Chinese companies. Similarly, the Chinese government is requiring that all foreign companies transfer their technology to China before selling their products in that market. Without taking the appropriate steps, complacency would be troublesome for America. However, if handled correctly, the U.S. should, and will remain on top.

The question then becomes, how can the U.S. address this issue? It’s a loaded answer, but for starters, it’s an absolute necessity that the United States begins incentivizing innovation. Companies should be rewarded for creating cutting edge products, and individuals should want to create new things. The U.S. government could attempt a subsidy program, or better yet for large corporations, tax breaks. Or perhaps award scholarships to those students who are able to come up with beneficial ideas. Things such as this will have the effect of instilling a drive in these groups to enhance research and development, which in the end produces results. I am aware it is much easier said than done to install programs, however there are several viable options that could yield positive results.

When it comes down to it, the U.S. was founded on the notion of creativity and innovation. It is what allowed the forefathers to create such a unique and successful nation. Without the consistent presence of new products and ideas, the U.S. would not have sustained over time. In order to last another 200 years as the preeminent world power, America needs to dig deep and explore its creative side. Although now is not the time to sound the alarm, that day could come down the line, if the issue of innovation is not addressed.

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Filed under Economy, Politics