Chinese Manufacturers Are Scrambling To Replace Workers With Robots As Wages Soar

Tepid wage growth has been frustrating Americans for years. But if trends in China’s manufacturing sector have any bearing on the US, there’s an upside to stagnant pay: Workers get to keep their jobs – for now, at least.

In China – where real wages have doubled in the past decade – the opposite is true: Manufacturers, squeezed by rising labor costs and a paucity of skilled workers, are fueling an unprecedented boon in the adoption of automated technologies to cut down on the number of workers needed on factory floors, according to the latest findings of the China Employer-Employee Survey.

Ironically, the Communist Party’s willingness to support unprofitable businesses is compounding problems for Chinese workers, as many manufacturers are barely profitable to begin with.

As Bloomberg explains, China is no longer the cheap labor haven it once was.

“Monthly manufacturing wages reached 4,126 yuan at the end of 2015, equal to those in Brazil but much higher than Mexico, Thailand, Malaysia, Vietnam, and India.

At the same time, many firms are relying on government subsidies, while barely eking out profits or even losing money, according to the study released June 20. “Time is running out fast for Chinese manufacturers to adapt,” says Albert Park, head of the survey’s international committee and a labor economist at The Hong Kong University of Science and Technology.

The study canvassed more than 1,200 companies and 11,300 workers in Guangdong, China’s biggest manufacturing province, and Hubei, a major industrial base in central China. Some 26 percent of workers left their jobs annually in Guangdong and that turnover rate was even higher for younger workers, about 37 percent for employees below 28."

In a viral video published back in April, the People’s Daily provided a glimpse into the rapidly approaching future of China"s labor force: The video, also released by the SCMP, shows hundreds of round Hikvision robots, each roughly the size of a seat cushion, swiveling across the floor of the large warehouse in Hangzhou. A worker is seen feeding each robot with a package before the machines carry the parcels away to different areas around the sorting center. The robots sort more than 200,000 packages a day.

One factory owner explains to Bloomberg how he’s adding 40 robots to his workforce that will eventually allow him to reduce his human workforce by 25% or more.

“As he marches through a gritty factory that makes baby strollers and wheels, Hu Chengpeng says finding workers is his number one challenge these days. Turnover at the facility in Hanchuan in Hubei province in central China is running at 20 percent, even while wages have been growing by double digits for his 400-plus workers every year. “Labor costs are getting just too high,” he said.

All of which explains why Hu, 34, is embracing China’s robotics revolution. He has added 40 new robots, each costing 40,000 yuan ($5,850), this year to replace dozens of workers tasked with cutting plastic molding. Eventually the factory will use a quarter fewer workers than today, without having to reduce annual production, he said. Hu also said he plans to shift more production away from making simple components and towards producing higher-margin branded strollers.”

Engineers are rushing to replicate even the most basic advantages that humans have over robots. In a video published by Bloomberg, employees at San Francisco-based Autodesk explain how they’re designing software to enable robots to “see” their surroundings. The engineers say it will ameliorate safety issues that have been a barrier to wider adoption. Soon, they say, robots and humans will be able to work in closer proximity.

Luckily, robots still have a ways to go before they can "think" like humans, too.

One Belt, One Road, And One Debt Hangover

Autohred by Jim Rickards via The Daily Reckoning,

China is not only one of the world’s largest debtors, it is one of the world’s largest creditors.

China uses debt not in the customary financial manner, but as a political tool to generate employment and maintain social stability. Likewise China uses loans and investment as a tool to advance its strategic interests. This may be good geopolitics in the short run, but it will be a disaster economically in the long run.

Just as Chinese state owned enterprises (SOEs) can’t repay debts to Chinese banks, China’s foreign partners will not be able to repay debts to China itself. These twin disasters-in-the-making may converge in such a way that China’s assets disappear or become illiquid at exactly the time they are most needed to bail-out its own banking system.

China has launched four major overseas investment initiatives in the past ten years. The oldest is their sovereign wealth fund, China Investment Corporation, or CIC, established in 2007. Sovereign wealth funds are a way for countries to invest their reserves in securities other than safe instruments such as U.S. Treasury notes.

CIC today has assets of over $800 billion, spread among stocks, corporate bonds, hedge funds, private equity, commodities, and commercial real estate. Some of CIC’s investments are directly-owned enterprises, including gold mines in Zimbabwe.

While these assets may outperform Treasury notes over time, they are also illiquid, and would tend to decline in value during a financial panic. This means that about 20%, of China’s reserves are unavailable for critical tasks such as bailing out the banking system or defending the currency.

The second and third initiatives are the New Development Bank, NDB, created by the BRICS in 2014, and the Asia Infrastructure Investment Bank, AIIB, created by China in 2016. These have participation from 35 countries in the Asia/Australia region, and 18 other countries from outside that region, mostly in Europe. The United States refused to join.

Although NDB and AIIB are both multilateral institutions, China was the principal sponsor and a major source of funding. It provided about $10 billion to NDB and $30 billion to AIIB.

These banks will expand their lending capacity by issuing notes and will fund infrastructure projects in competition with the World Bank and its regional development banks — without interference from the U.S. on priorities.

China, One Belt, One Road

By far, the most ambitious outbound investment effort by China is the “One Belt, One Road” initiative. The “belt” refers to overland routes from central China to Europe. The “road” refers to maritime routes from eastern China to Southeast Asia, Africa, and Europe.

It is a recreation of the original Silk Road caravan route of the thirteenth century, and China’s glory days as a naval power led by Admiral Zheng He in the Ming Dynasty in the early fifteenth century.

The scope of the One Belt, One Road initiative is immense. It will include port facilities, railroads, highways, telecommunications channels, airports, transshipment facilities, renewable energy sources, and more strung out from Xian to Rotterdam, and from Guangzhou to Venice.

The graphic on the previous page shows the main corridors of the belt and road, but there are many ranches and capillaries not shown in detail. Of these offshoots, one of the most critical is a transportation link from Kashgar in western China to the port of Gwadar on the Arabian Sea in Pakistan. This route passes through disputed territory in Kashmir that could lead to a war with China and Pakistan on one side, and India on the other.

Another critical belt link runs from Kunming in southern China through Myanmar, Thailand, and Malaysia before terminating in Singapore.

Main routes in China’s “One Belt, One Road” Initiative are shown above. The overland belt is in green and the maritime road is in blue.

At a global leaders’ summit in Beijing on May 14–15, 2017, President Xi Jinping of China laid out his vision for the One Belt, One Road and committed $55 billion of lending capacity.

Vladimir Putin, president of Russia, was one of many foreign leaders present. The U.S. sent a low level delegation, probably including CIA assets, attempting to get a read on Putin, Xi and the North Korean delegation.

The problem with One Belt, One Road is that many of the potential recipients of development loans are not highly creditworthy or have a track record of defaulting on debts or requiring substantial debt restructuring in order to stay current.

As with Chinese bank loans to SOEs, the NDB, AIIB, and One Belt, One Road efforts are not primarily economic but political. China is seeking to use its economic clout to create jobs and control critical infrastructure.

In the end, China is attempting to create a geopolitical sphere of influence of even greater scope than the Japanese Empire prior to World War II, called by Japan “The Greater East Asian Co-Prosperity Sphere.”

As with its other policies, China will turn liquid assets into illiquid assets in order to pursue its ambitions. This could make sense if nothing goes wrong. But, things will go wrong.

China will face a monumental liquidity crisis sooner than later and find that its liquid assets have been turned into bridges to nowhere.

Chinese Multibillionaire Defaults On Retail Bonds Due To "Severe Cash Crunch"

Italy"s Monte Paschi isn"t the only institutions that is about to soak retail investors who thought that two bailouts for Italy"s third biggest bank in two years wouldn"t be followed by a third nationalization in year #3. According to the South China Morning Post, a Chinese multi-billionaire businessman has defaulted on bonds worth a paltry 100 million yuan ($14.4 million) that he raised from retail investors, citing "tight cash flow", according to reports.

Wu Ruilin, chairman of the Guangdong based telecom company Cosun Group, has a personal fortune of 98.2 billion yuan, or just over $14 billion, China Business News (CBN) reported citing an audit by a third party. That makes Wu wealthier than Baidu’s founder Robin Li, who has 98 billion yuan and is ranked 8th on the Hurun Rich List 2016.

And yet, despite the founder"s personal fortune, according to a notice put up by the Guangdong Equity Exchange on Tuesday, two subsidiaries of Cosun Group are each defaulting on seven batches of privately raised bonds they issued in 2014. According to the notice, “the issuer had sent over a notice on December 15, claiming not to be able to make the payments on the bonds on time, due to short-term capital crunch.”

The good news, is that Wu is allegedly making unlimited guarantees for the principal and interest on the bonds with, what SCMP calls, "all of his legitimate wealth." Meanwhile, Zheshang Property and Casualty Insurance Company is responsible for the bonding insurance that guarantees scheduled payments of interest and principal on the bond, the notice said.

The bad news is that neither Wu nor the insurer had put the payments into the relevant account by 5 pm on Tuesday, according to the exchange notice. Although the bourse did not specify the value of the bonds, CBN said they were together worth around 100 million yuan.

SCMP adds that calls to Cosun went unanswered on Wednesday.

Philip Sun, an analyst with central China based JZ Securities, said it made no sense for Wu to “purposely defaults on the bonds” as it would “severely affect his credit and make institutional investors panic”, which would create bigger problems for him.

“Either he was building his business on high leverage, or he is determined to count on the insurer, but it is for sure he really has a severe cash crunch,” said Sun. CBN reported, somewhat redundantly, that some investors said they would sue Cosun and Wu Ruilin himself.

Still, one wonders if the (formerly) prosperous company of a Chinese billionaire is on the verge of bankruptcy due to a "severe cash crunch", just how bad is the cash crunch behind the scenes in China, and how much longer can the PBOC keep keep the charade that all is well going?