We were very pleased to learn from Onlinecollege.org that they had named ManagingtheDragon.com one of the 30 Best Blogs to Follow China Business News.

Here is what they said:

As China continues to emerge as a world power and significant force in key diplomatic issues and especially in influencing the international business community, those in the West need to keep up with all the developments coming from the East. Through blogs like these, you can learn about Chinese business history, the stock market and economy, language and cultural issues, green industry, and other topics that herald the new China. Whether or not you’re earning an online college degree in business, take a look at these blogs that can teach you a lot about the future of our economy, as well as China’s business news.

Managing the Dragon: From the auto industry to technology to globalization and the environment, Managing the Dragon covers “business in China — from the ground up.”

Onlinecollege.org is a one-stop source of information regarding online college programs. The company and its site provide prospective students with information about online college admissions, accreditation, student loans and student aid. The top online colleges are featured on the site which also provides higher education news. Up-to-date and insightful articles enable students to earn a degree and gain a valuable, real-world education at the same time.

The People’s Bank of China, China’s central bank, announced over the weekend that it will resume a gradual appreciation of the RMB against the U.S. dollar, and that it will manage the yuan’s exchange rate with reference to a basket of currencies, rather than pegging it to the dollar. The PBOC statement makes it clear that the currency will move only very gradually. Along with most economists, Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Market, expects appreciation to return to the 5 to 7 percent pace of the 2005-2007 period.

Contrary to what Secretary of the Treasury Timothy Geithner and the politicians in Washington might think, the unhinging of the RMB from the dollar is not necessarily a good thing for the American economy.

For starters, the gradual appreciation of the RMB against the dollar will not create enough new jobs in the United States to have any material impact on the country’s unemployment rate. At the margin, some American products may become more competitive due to a more highly-valued yuan, but the jobs most affected in China — those with high labor content — are unlikely to move to the United States. Instead, they will move from factories in China’s coastal areas to factories in the country’s inner provinces where costs are lower, or perhaps to less developed countries with even lower wage rates.

In the meantime, China’s manufacturers will continue to do what they have been doing, and that is to move up the value chain to manufacture more highly value-added products where raw materials and engineering design are the most important cost components. Chinese manufacturers will be able to purchase raw materials more cheaply with a more valuable yuan, and higher value-added products take greater advantage of China’s vast pool of low-cost engineering talent. As a result, Chinese products will continue to be very competitive with those manufactured in the United States.

From 2005 to 2008, when the yuan appreciated by 20 percent against the dollar, China’s exports to the United States increased by 40 percent. That’s because a more highly-valued yuan meant that Americans had to pay more for the products that they bought from China, and the composition of China’s exports to the United States began to change. I expect the same to happen this time around.

Also, the RMB peg to the dollar has provided much-needed support for the dollar as China has had to buy U.S. Treasuries and other dollar-denominated assets to maintain its targeted exchange rate. This is one of the factors that has enabled the U.S. government to finance large deficits with no increase in interest rates. At the margin, China will now buy fewer Treasuries and dollar-denominated assets than they would otherwise, in favor of assets denominated in other currencies such as the Euro. The net effect will be higher interest rates and higher inflation for the U.S. economy.

Since our last post, the video for the panel discussion, Speeding Ahead: China’s Auto Industry, held at the JP Morgan China Conference 2010, has become available. I had the opportunity to participate on this panel with Michael Dunne, President of Dunne & Co. and Dr. Enki Tan, Executive Chairman of GITI Tire. The video runs for approximately 50 minutes and includes opening comments by the three panelists, as well as the entire question and answer period.

During the Q&A segment, we fielded questions on a wide range of issues including the Foxconn suicides and the strike at Honda and what they may mean for wage costs in China, preserving margins in China, electric vehicles,and the overseas expansion of China’s vehicle makers. Given growing trade tensions between the United States and China, Dr. Tan made a particularly telling comment about the impact of tariffs.

As the head of a major tire company that manufactures tires in China, Dr. Tan is in an ideal position to comment on the tariff on tires made in China implemented by the Obama Administration last year. According to Dr. Tan, the tariff cost American consumers $2 billion and did not produce a single U.S. job. That’s because the capacity to produce the tires affected by the tariff does not exist in the United States, and companies like GITI Tire simply passed along the higher costs to consumers.

U.S. lawmakers would do well to listen to the comments of knowledgeable industry insiders like Dr. Tan when formulating policy.

Last week, Jing Ulrich, Managing Director and Chairman of China Equities and Commodities for J.P. Morgan, held her annual China Conference at the Grand Hyatt in Beijing. J.P. Morgan’s much anticipated event brings together investors from all over the world, and this year’s gathering was no exception– Jing told me that participation reached an all-time high of 2,000 investment and company professionals. As much as anything, that is an indication of how much global attention is on China as an investment theme.

My role at this year’s conference was to participate on a panel, Speeding Ahead: China’s Auto Market, along with Michael Dunne, President of Dunne & Co., and Dr. Enki Tan, Executive Chairman of GITI Tire. Each of us provided 10 minutes of commentary and then opened the session up to questions from the floor.

In my opening remarks, I took the opportunity to comment on the disconnect between auto sales and gasoline consumption, China’s commercial vehicle market and vehicle exports.

In discussing the first topic, I reiterated what I covered in my recent post, Inkfish and Oil: A Disconnect With Surging Auto Sales. Therefore, I will not repeat what I said here, except to remind everyone to “remember the inkfish” when trying to understand China’s auto industry.

I also advised the audience to remember commercial vehicles. Passenger sales tend to receive all of the attention, but the mundane business of trucks and buses is a big industry in China. Of the 13.6 million vehicles produced and sold in China in 2009, 8.4 million were passenger cars, but 5.3 million were trucks and buses. Through April of 2010, commercial vehicle sales were up 55 percent over last year, a bit less than the 66 percent growth in sales achieved by passenger cars, but still a healthy increase.

During the first four months of the year, the Chinese bought 2.5 million trucks and buses, compared to 3.7 million passenger cars. This segment of the market is a major beneficiary of the switch from unconventional to conventional vehicles discussed in our post on the subject. Approximately 80 percent of the commercial vehicles sold were mini and light trucks and buses, ideal replacements for agricultural vehicles and those ever present inkfish.

With China’s fast-growing economy, however, heavy duty truck sales are also booming with unit sales up 132 percent so far this year. During the first four months of 2010, 383,000 heavy duty trucks were sold, and volume should top 1 million units by year end. That makes China, by far, the largest truck market in the world. By comparison, approximately 200 thousand to 400 thousand heavy duty trucks are sold in the United States every year, depending upon economic conditions. Publicly-traded truck companies like Sinotruk, and the publicly-traded makers of the diesel engines that power them such as Yuchai and Weichai, have very strong market positions in the China market and very bright futures as a result.

Vehicle exports from China have been out of the news for the past several years, but I believe they will begin to return this year. In 2004, China exported a mere 78,000 units. Exports began to take off afterwards, though, and reached 612,000 units in 2007. Vehicle exports got off to a fast start in 2008, and industry experts were certain that a record 1 million units would be exported in that year. The global economic crisis intervened, however, and China’s markets in Russia, Poland, Middle East North Africa and Vietnam evaporated overnight as those economies felt the impact. Rather than being a record year, vehicle exports in 2008 were flat with 2007.

Poor economic conditions in 2009 caused China’s vehicle exports to fall further to 332,000 units in 2009, but we are now seeing a rebound from those levels. Vehicle exports during the first quarter were 106,000, up 52 percent over last year.

As the developing economies of the world recover — former Soviet bloc countries and countries in the Middle East, Africa and Southeast Asia — they become natural markets for cars, trucks and buses made in China.

Few news items regarding China have been more puzzling than the recent string of suicides and attempted suicides at a giant factory complex in Shenzhen where electronics manufacturer Foxconn employs 300,000 workers. In the first five months of this year, 13 workers have tried to commit suicide, with 10 succeeding.

Foxconn, a subsidiary of Hon Hai Precision Industries, is the world’s largest contract electronics manufacturer, serving some of the best-known names in the consumer electronics industries. Among other products familiar to consumers, Foxconn in China assembles Apple’s popular iPhones and iPads. The deaths have prompted Apple and Hewlett Packard to initiate probes into the situation. Sony, Nokia and Nintendo, which also produce products at the plant, said they would also investigate the suicides.

The suicides have left industry and China observers scratching their heads, trying to understand why this is happening at this particular factory at this particular time. However, it’s sometimes easier to explain why something isn’t true than it is to provide a rational explanation for events such as these. That’s what I told Sam Gustin, a senior writer at DailyFinance who covers general business news with a particular focus on technology, finance, digital media and government regulation, whether sweatshop conditions at the factory had lead to the suicides.
Here is what I told him:

This is a puzzling one, Sam, but I believe that placing the blame on sweatshop conditions at Foxconn is far too simplistic. The real reasons, and I don’t know whether we will ever know them for sure, are bound to be much more complicated, as discussed in a recent Wall Street Journal article.

At the same time that all of this is happening, there has been a spate of attacks on schools and schoolchildren in China, which is also unusual and unprecedented. I’m not a psychologist, but there must be a broader, sociological explanation for both recent epidemics.

Sam’s article, Steve Jobs: Apple Is ‘All Over’ Foxconn Suicides, summarized my comments.

Liam Denning, a Wall Street Journal reporter who writes for the newspaper’s “Heard on the Street”, called late last week with a question. Liam was puzzled by the apparent disconnect between fast growing vehicle sales in China and much slower growth in gasoline demand. Here was his dilemma:

As China’s vast population grows richer, so the thinking goes, so will its appetite for more of everything. Yet, as Deutsche Bank’s Paul Sankey points out, Chinese passenger-vehicle sales surged 77% year-on-year in the first quarter. Yet apparent gasoline demand rose by just 3%. Indeed, consultancy JBC Energy reckons Chinese demand for gasoline has been flat since last July.

Why the disconnect?

China often operates in ways that are perplexing. That’s because, for all of their growth and development over the past 30 years, China’s economy and markets often work differently than more familiar ones in the West.

The concept of China’s two markets has been discussed often on MTD, but Liam’s question once again brings us back to the fact that for every product in China, there are two markets: a foreign/local market that is characterized by high price and high technology, and a purely local market that is characterized by low price and more basic technology. This is a result of the fact that China’s 1.3 billion population is comprised of approximately 400 million people with average per capita incomes of $8,000 or more, and 900 million with average per capita incomes one-tenth that amount.

When applied to vehicles, the headline number is that 13.6 million vehicles were sold in China last year, but that is just the tip of the iceberg. Those are just the vehicles that look like the cars, trucks and buses one might see on the streets of any city in the United States. Every year, China produces approximately 50 million gasoline and diesel engines for transportation. In 2009, 13.6 million were used to power the conventional vehicles used in the country’s foreign/local market, but 36 million went to the more unconventional vehicles used in China’s purely local market– the motorcycles, agricultural vehicles and “inkfish” that Liam referenced in his article.

Once these facts are understood, it is quite easy to understand the disconnect between surging vehicle sales and slower growth in gas demand, and that is what I explained to Liam. As fast as China’s economy is growing, demand for vehicle transportation did not grow by 77 percent during the first quarter, as the vehicle sales numbers for the period might suggest. Part of that growth, to be sure, was due to overall growth in demand, but a big part of it I suspect is due to the switch from less fuel efficient and environmentally friendly unconventional vehicles, to more fuel efficient and environmentally friendly passenger cars, trucks and buses.

The switch from those inkfish, agricultural vehicles and motorcycles to mini vans, mini and light trucks and passenger cars with smaller displacement engines not only reflects China’s economic reality, but it also is government policy. As part of its stimulus package, China provided incentives for those in its rural economy to trade in their less fuel-efficient vehicles for more conventional means of transportation. When trying to understand China’s vehicle industry, don’t forget the inkfish!