I did a spot on CNBC Squawk Box this morning to discuss the impact of the recent unrest in China. Much of the news surrounds stories about migrant worker protests. As I wrote yesterday, the drivers for the protests making the news is not ideology–it is practical life issues like pay, jobs, work practices, discrimination, and corrupt local government officials. Wen Jiabao recently said that corrupt officials is China’s greatest crisis. Last year more than 146,000 corrupt officials were arrested in China; 97% of them were at the county, city, or village level.

Our discussion this morning turned on the impact on the US. The biggest US risk is supply chain interruptions, much like the Japanese earthquake. Just under half the manufacturing capacity in the world is in China. Much of it is in southern China, especially Guangdong, where the factories are operated by migrant workers from Sichuan, Hunan, and Xinjiang. Recent job losses in Guangdong caused by “hollowing out,” (businesses moving to cheaper locations in Vietnam and other Asian countries) are a real problem. Migrant workers are often the only source of income for their families in poor villages in western provinces. Rising food prices has also put the squeeze on migrant worker incomes, even though the incomes are rising at 10% per year.

All this is interesting, but what I care about are the people. It is easy to lump groups of people together and call them “migrant workers” if you have never met them. Not so easy when you know their names.

I thought I would just take a minute to inject a little humanity into the story by posting a few pictures of the kids I work with in the migrant worker schools in China. For several years, my partner Fred and I have organized teams of university students to work in primary schools in poor villages, often migrant worker schools. We have done projects in Tibet, Yunnan, northern China, and tried to do one in North Korea that failed to happen. In each case, we supply the students with books and materials to build libraries and kitchens, plant gardens, pay student fees, and give the children pencils and paper. The students spend a month or more in the schools teaching and working with the children.

Here are a few pictures from one of our recent projects in a migrant worker school in northern China.

The photo above is our team for a migrant worker school project. Fred (white t-shirt just in front of me) is my partner in all the projects we do. Ethan (black Rutledge capital shirt in front of me) was team leader for this project. The other team members are students at China Agriculture University.

Below are a few of the children, including an unforgettable kindergarten student showing me her very beautiful graduation dress.

This is a migrant worker school classroom. The classrooms have no doors and no heat in the winter–the students weal heavy coats in class to stay warm.

Finally, the picture below is a very special one for me. We were able to arrange for 15 of the students graduating from the migrant worker school to go to the official public school nearby, which will allow them to later go to university. They needed clothes, school supplies, and the like to fir into the new school. This is a picture we took on their first day of class. I keep this photo on my desk.

I hope you get to meet some of these wonderful children one day for yourself.

JR

(June 14, 2011) Last week I had the pleasure of participating in a public forum hosted by the Common Ground Committee in Darien CT. You can watch a  video of the forum at the Common Ground Committee’s website.

The thesis of the forum is to explore a controversial topic and look for common ground–areas where both sides can agree–to use as a basis for building a solution. Our topic was China: Threat or Opportunity?The forum was moderated by John Yemma, editor of the Christian Science Monitor, where I ran an op-ed on the subject ahead of the meeting. The combatants were Henry Tang, Alan Tonelson, Peter Ford, and myself, with Kraft Bell facilitating the event.

The answer, of course is yes; China is both a threat and an opportunity from the viewpoint of the US. People are finally realizing that China is big and growing fast. People here know very little about China because most Americans do not travel there and because we still have a cold war image of China in our heads–grey jackets, bicycles, red books. Trust me; that image is no longer true of China.

China will overtake the US in GDP within 5-10 years. China and the US will soon be the only two elephants left in the room. We simply must expend the energy to get to know each other because conflict between the two elephants would be unthinkable. I am convinced that the security and prosperity of my children’s and grandchildren’s lives depends more on the relationship between the US and China than any other question.

I hope you enjoy the video.

JR

I did a spot with Larry Kudlow tonight to discuss today’s retail sales reports that seems to have been a major impetus behind today’s huge stock market increase. Great to work with my old friend again. Not many know this, but Larry and I have been working together since 1976 when he was Chief Economist at Paine Webber and I was a professor at Claremont Men’s College (known as Claremont McKenna College today).

The US Advance Advance Monthly Sales for Retail and Food Services Report for was down -0.2% for May (+0.3% excluding motor vehicles), and +7.7% over year ago levels (+8.2% excluding motor vehicles.) Analysts focused on the numbers excluding motor vehicles because the supply chain interruptions caused by the Japan earthquake made a significant dent in assembly and sales. The stock market interpreted this number as “no double dip recession”. Nice.

The Chinese retail sales number was even better. May retail sales were +16.9% over year earlier levels and a big jump over April. This was important because US investors have been hyper-ventilating over the idea that China’s growth was about to end. (They did this about once every 6 months. I don’t know why.) The truth is retail sales in China are doing fine, signaling continued strong growth.

The interesting stuff, as usual, is in the details. Among the components of the retail sales index sales of oil products were +42% above year ago levels, jewelry sales were +43%, and grain and edible oil sales were +24%, revealing the effects of rising oil prices, gold prices, and food prices. But middle class luxury items were up big too including  cosmetics (+20%), personal care goods (23%) and garments (22%). Government policy is trying to increase the consumption share of GDP relative to the investment share, which should keep retail sales strong in coming years. (If you want to watch a company in this sector, Haier Group makes washing machines and water heaters and is a powerful brand in China. Haier’s revenues should grow 20% next year producing 25% earnings growth–the stock sells for 15x 1011 earnings and 8x 2011 EBITDA in the Hong Kong stock market.

Other supporting growth news this week include:

• +13.5% industrial production growth in May.
• +34.6% real estate investment growth January-May
• +33% Real estate sales growth January-May
• +25.8% fixed asset investment growth January-May.

Less positive news:

• +15% M@ growth in May is a little slower
• +5.5% CPI inflation in May is a big number

China’s central bank raised reserve requirements today again for the 6th time this year (after 6 times last year) to 21.5%. They are doing this to show the government’s concern about inflation, which means rising food and gasoline prices to the man on the street. These tightening moves are not as tough as they would be here in the US–banks are not nearly loaned up anyways. But if they keep beating on this horse long enough it will surely have an impact.

Larry made a point during the show that I think is worth remembering. From our perspective, a little slowing in China and a little lessening of inflation pressures are not necessarily bad things. Slower growth and lower inflation would be easier to maintain.

China’s stock market was up big today after being driven more than 12% lower since April by falling growth worries. I think that market is pretty cheap today, as are the stocks of US companies who sell retail products in China. That’s where I am putting my money.

JR

(June 14, 2011) Will do an early morning spot on CNBC Squawk Box tomorrow (Wed. 6/15/11) 8:40AM Eastern time (5:40AM hit for me here in California–argh!). Hope you can dial us in.

The topic will be the recent unrest in China that was the subject of the Wall Street Journal front page story today. There have been a series of public protests in recent weeks in Inner Mongolia, Lichuan, and Zengcheng, including bombs set off in Fuzhou and Tianjin a few days ago. Individually, the events are hard to connect: a Mongolian sheep herder accidentally killed by a Chinese truck driver; protests against corrupt local officials and property seizures; rough treatment of a migrant street vendor by police. Together, they reveal the stresses on a population struggling to deal with rapid change, corrupt local officials, rising food prices, and especially for migrant workers, uncertain paychecks.

As I have written many times before, every policy discussion with a Chinese leader focuses on a single goal–social, economic, political stability. Cynics say that is because the government wants to continue in power. Optimists say it is because the government knows they must keep China growing for a long time to catch up to the rest of the world’s living standards. China has grown by an incredible 10% per year since it was opened up 33 years ago. That growth has increased per capital GDP by a factor of 23 times from roughly $200 per year when Deng Xiao Ping opened China to market reforms in 1978 to roughly $4800 today ($8200 if measured adjusted for purchasing power.) But US per capital GDP is about ten times that high at roughly $50,000 per year. It will take decades for Chinese incomes to rise to US or European levels even if growth remains at 10%, which gets harder to do as incomes rise.

I don’t think the pressures than are making people angry are going to disappear overnight. That means we are going to see more protests, and more policy responses that are equal parts harsh security measures and accommodative economic policies designed to keep maintain high rates of steady economic growth. As an example, China’s huge stimulus program during the recent financial crisis was heavily weighted toward infrastructure and construction to keep the 100+ million migrant construction workers in China’s cities employed so they can continue to send money to their families in poor villages in western China.

The one think I can say about the protests in China is they are not ideological. They are often about very practical, local issues like food prices or a land grab by a city official. That means we should be careful not to make sweeping generalizations about them. In China, as in the US, the interesting stories are in the detail. These stories are heartbreaking. As you may know, I work with migrant workers’ children in China, building libraries and kitchens in grade schools and providing scholarships so kids can go to school. They don’t need life to be tougher than it already is.

Tune into our discussion on Squawk Box tomorrow. I will try to come up with something clever and insightful to say about all this by then but don’t recommend you hold your breath until I do.

JR

China’s energy supplies are heavily concentrated in coal, which is one reason so much effort is being expended to clean up the air and water and devise cleaner energy sources. The Chart below, taken from a McKinsey report, China’s green opportunity, suggests that China’s policies can do a lot to mitigate the problems in coming years. Very optimistic report.

Which reminds me. On Forbes on Fox tomorrow morning (10:20 EST) we have a spirited debate about the impact of green policies on the economy. I take the position that the proposed cap and trade legislation is a massive tax on working people and would have a very negative impact on growth. At the end of the day our living standard will be exactly as high as the amount of work that is performed int he economy. That includes work done by people, work done by current sunlight (agriculture and solar power), and work done by transforming stored solar energy (oil, gas, coal, uranium) into goods and services.

JR

(May 16, 2009) Yesterday I woke up a lot earlier than I like (that would be noon) to do the Fox Business 8AM Money for Breakfast show with Alexis Glick. Our assignment was to review the impact of recent government policies on the economy. It was set up as a debate with me squaring off against Christie Hefner (yes, that Hefner). Fun stuff. Here are a couple of the things we discussed.

JOBS- Government policies are destroying jobs, not creating them. The Treasury alphabet programs (TARP, TARF, BARF, TALF, ALPO, WALDO, DILDO,…) should have been titled the Hedge Fund Relief Act. They have set up a situation where banks can make tons of money by selling bales of certain kinds of paper to hedge funds who will make 30% returns on the paper. Banks have responded by ordering their troops to shut down all other activities, including small business loans, personal credit lines, home equity lines and jumbo mortgages.

Memo to Geithner (the Doogie Howser of finance): ALL JOBS come from small businesses. The shutdown of business credit lines is forcing small businesses to fire people. We get heart-breaking calls from these people every Saturday noon-2PM on our FBN entrepreneur show. You can measure the impact of the working capital shutdown in the weekly new unemployment claims reports (+637,000 last week) and the monthly job reports (-539,000 in April). You can also measure the loan activity directly in the chart below.

Tomorrow I will guest host the Fox Business noon show with Cheryl Casone and Tom Sullivan.

I will join Rebecca, Cody and Erik on Happy Hour tomorrow to talk about the stock market, China and North Korea.

Tomorrow I will join Cheryl Casone and Tom Sullivan on the Fox Business noon show for the full hour to try and make sense out of the tsunami of weird stuff coming out of Washington this week. Be there, or else!

Our new Fox Business entrepreneur hour will be on 1-2PM EST. We will tell you the story of our young (4 year old) viewer who got a patent on his idea after watching last week’s show. Hope to have him on the show live.

This weekend I will be on Forbes on Fox 11AM EST Saturday.

And will be on Fox Business Huckabee show too. Hoping to play in the band at the end of the show if I can get to Sam Ash and buy a ukulele before then.

JR