Yuan-dollar rate doesn’t drive Chinese rebalancing

By Wei Gu
June 21, 2010

Who will be a bigger driver of global trade rebalancing – the People’s Bank of China or the country’s migrant workers? The PBoC guides the yuan exchange rate, which U.S. politicians and investors are fixated on. But other factors, including labour costs, are probably doing more to increase the cost of exports from China.

China’s yuan reforms got off to a slow start on Monday. The central bank set the daily mid-point for yuan trading at Friday’s level. The currency strengthened slightly thereafter, rising by about a third of a percent in the afternoon to its strongest level since late 2008.

But the dollar exchange rate is only one number — and maybe not the right one to watch. The People’s Bank of China watches closely the so-called “effective exchange rate”, tracked by the Bank for International Settlements. That is measures of relative costs among different countries.

This rate rose 4.8 percent from November 2009 to this May, and 3.4 percent in May alone, according to the BIS. By that measure, Chinese competitiveness is at its worst level since 1994, except for the eight crisis-wracked months after October 2008.

Labour and energy costs are making Chinese goods more expensive. Fourteen provinces have already raised their minimum wages by 20 percent this year, not to mention high-profile pay hikes at companies such as Foxconn and Honda. Chinese gasoline prices, meanwhile, are now 60 percent higher than in the United States, having been roughly equal in 2008.

Higher costs are already making Chinese goods less attractive to both foreign and domestic buyers. China posted its first monthly trade deficit in six years in April and only narrowly returned to trade surplus in May. The euro crisis only partly explains the shift.

The nominal yuan exchange rate will continue to be a focus for China’s trade partners. It has risen 20 percent against the dollar since 2005, and may have further to go. Yet labour costs have doubled during the same period, taking official data on rural income levels as a guide. That should be a much powerful force for shrinking China’s trade surplus.

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Yuan-dollar rate doesn’t drive Chinese rebalancing.
The majority of goods shipped from China are not manufactured in China usually they are assembled there.
Most of these assembly facilities have long term contracts with companies whose parents are located outside China.
With over a billion people to house and feed it is not surprising that there manufacturing cost are increasing hence the parents will be looking for more cheap labor facilities.
However, this option is limited as there is no other country; with such a vast reasonably well educate labor supply.
Hence we can all look forward to increased cost of cell phones and washing machines to name a few items.

Posted by The1eyedman | Report as abusive