China’s place as the factory of the world is at the heart of its growth story. Low cost labour, cheap exports. That’s the Chinese way.
So what happens when those exports aren’t so cheap any more?
Currency pressures abroad and labour issues at home make the question increasingly relevant. This week trade figures between Mexico and the US produced a shot across the bows.The FT’s Adam Thomson explains:
In April, Mexico reported a trade surplus of $195m – in contrast to the deficit many analysts had expected. Moreover, exports to the US during the first four months of this year were $91.3bn, a 35 per cent gain over the same period last year. The increase boosted Mexico’s share of US imports to an all-time record: 12.3 per cent of the total compared with 11 per cent in 2009. By contrast, China’s share dropped to 17 per cent from 18.4 per cent last year.
That surplus was boosted by sales of consumer goods – like washing machines, as well as cars. The fact that Mexican-made goods can arrive in the US within hours certainly helps, but there’s another factor at work here too: foreign exchange. As Bloomberg reported:
Exporters have also benefitted from a weaker peso, which makes Mexican goods cheaper in dollar terms. The currency declined to as much as 15.57 pesos per dollar in March last year from as strong as 9.86 pesos in August 2008, a 37 percent drop.
And it isn’t just a Mexican anomaly. China is beginning to look at its biggest trading partner – the eurozone – and flinch. The euro is now at 2002 lows against the renminbi. Small wonder then that the if and when China moves on its currency is still anybody’s guess.
As the FT’s Peter Garnham and Robert Cookson explained last week, the weaker euro prompted the market to rethink its expectations of an imminent revaluation of the RMB:
…Yao Jian, a Commerce Ministry official, saying on Monday (May 17) that the euro’s rise against the renminbi “will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries”.
This has prompted a scaling back of expectations that China will let its currency strengthen.
“The near-term probability of a revaluation looks increasingly unlikely because of what has happened to the euro and more broadly the global market uncertainties,” says Wensheng Peng, head of China research at Barclays Capital. However, he says reform of the exchange rate regime remains an important objective in China.
If the Mexican figures are repeated elsewhere then the Commerce Ministry will have fresh evidence for its argument against a revaluation. And there’s another dimension that may become increasingly relevant here: wage pressure.
As the FT reported today, Honda was forced to shut down a plant in China after workers went on strike demanding higher wages. Honda’s employees in Foshan earn about Rmb1,500 per month and are demanding an increase to Rmb2,000-Rmb2,500. And last month Jiangsu Province raised its minimum wage level by 13 per cent.
Those who expect a revaluation soon believe that the central bank has won the argument – inflation is the major threat, and the rising wages will add weight to their argument too. Some investors still expect a revaluation as early as next month. And as one hedge fund investor pointed out to beyondbrics, the RMB appreciated by 10 per cent between 2005-2008, and it didn’t dent Chinese growth.
But if other emerging – and indeed developed – markets are seen to benefit from China’s stronger currency, and demand for higher wages at home become more widespread – the debate of the renminbi could get even more complicated.
Related reading:
China Falls Victim to Greek Deficit Contagion: Michael Pettis – Businessweek
‘Made in Mexico’ gains ground on China as attention to detail boosts US demand – beyondbrics
