Hope and warnings abound as jobs shift

An article in The News Journal last week reported that the decades-long trend of manufacturers leaving the U.S. to set up plants in China is being reversed. A number of foreign companies like Rolls-Royce and Siemens plan on building new manufacturing plants in the United States, not just to serve our domestic market, but also to ship products made here to markets in Europe, Asia, Saudi Arabia and Mexico. “The global economics have shifted dramatically,” Hal Sirkin of the Boston Consulting Group was quoted as saying. “The wind was in our face. Now, we’re starting to see a tailwind.”
“From 2007 to 2012,” the article said, “foreign investment in U.S. manufacturing totaled $493 billion, compared with $270 billion the previous six years, according to the Organization for International Investment.” I have previously cited in this column a 2011 Boston Consulting Group study. It concluded that over the next five years “executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs. They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother – and that’s before taking into account the added expense, time, and complexity of logistics.”
Based on Tthe News Journal story, this seems to be happening a lot faster than the 2011 study anticipated. What is happening in China that might be accelerating this new trend? That’s a hugely complicated issue, but let me share just a few stories from my newspaper and Internet reading over the past couple of weeks.
It is clear that China is beginning to experience economic troubles. Last week Chinese Premier Li Keqiang was in Berlin speaking about the difficulties China was having in generating the annual growth rate its economy needs to assure jobs for new workers. In fact, the government admits that only slightly more than half of its college graduates had jobs when they graduated this year, down 7 percent from last year.
That statistic is suspect because the government’s funding of universities is based in part on the percentage of their graduates that have jobs. To keep their percentages up, some universities require proof that a candidate for graduation has a job. No job, no diploma. But that policy has in turn resulted in the scandal recently reported by the Global Times, an English language tabloid own by the Chinese Communist Party: “The business of selling fake employment contracts to graduating university students is booming, according to illegal vendors.”
And you thought our college graduates faced a tough environment.
There is a genuine obsession with stability in China, no doubt created to some degree by memories of the Cultural Revolution that tore the country apart between 1966 and 1976. This makes the remarkable economic growth the country experienced until recently a double-edged sword. The Chinese people have come to expect an ever-higher standard of living. What the governing class fears most of all is a recession that might well create political as well as economic turmoil.
They are right to be worried. There are signs that China’s credit rating might soon be reduced, signaling that economic downturn. Tom Byrne, the head of Moody’s sovereign risk group in Asia said recently, “If we thought the economy was going to slow very rapidly from 7.5 percent to 7 percent to 6.5 percent, maybe we wouldn’t wait until it comes to 6 percent to see whether there are pressures on our rating.”
There have been constant rumors for years that Chinese banks were falsifying their balance sheets, which were full of non-performing loans and were in danger of failing. Is that possible?
Perhaps it isn’t related, but the sale last week by Goldman Sachs of its remaining stake in the Industrial and Commercial Bank of China might be a sign that the smart money is leaving. Goldman was anxious enough to get out that the $1.1 billion it received for its shares was 2.5 percent less than recent market prices.
I began this column with good news for us – a rebounding manufacturing base in the United States means a much healthier domestic economy. But China’s economic woes could be very bad news for the globalized international economy. And the prospect of a politically destabilized China would make the world a far more dangerous place.

Ted Kaufman is a former U S Senator from Delaware