Friday, December 16, 2011

Globalization/China: Be Careful What You Wish For

Not long ago China was in the pillory. U.S. politicians claimed that the Chinese currency, the yuan, is undervalued. They lamented that Beijing is manipulating the exchange rates and keeps the price of the yuan artificially low to give their exporters an unfair advantage on the world markets. They demanded that China must appreciate the yuan in order to raise the prices of their export goods on the global markets.

It seems that is exactly what is happening now, though in a clandestine way. The "Wall Street Journal" reports that many goods imported from China are getting much more expensive because the labor costs in some industries have risen 15% to 20% in the past year ( Other media say already "Bye, Bye, cheap Chinese labor (globalpost). And CNBC quotes analysts who predict that the "US may rival China in job competitiveness soon" (cnbc).

The climbing salaries in China which cause rising prices for exported goods work like an appreciation of the Yuan. U.S. and European importers, who buy Chinese goods, have to pay more Dollars for them now.

This reminds me of John Maynard  Keynes. The famous  economist talked once about a economic policy which alters currency exchange rates instead of salaries. He spoke about a country which loses international competitiveness because of high wages and prices. This country could get globally  competitive again if it reduces its wages, said Keynes.  But he admited that cutting the wages would be very unpopular politically. Therefore the country should devalue its currency and reduce the prices of their products on this way.

China is now the opposite case. The country is very competitive thanks to low wages and therefore prices. But this is changing now. The rising wages are a reaction to the still high economic growth rates in China. They are slowing down the Chinese export growth now, which you can already see in the statistics, but they are otherwise financing much more domestic consumer spending. Therefore China is now changing from a very export focused economy into a country with a strong domestic demand, like other big countries, for example the U.S.

I am not sure if the clandestine Chinese appreciation is a reason to celebrate. Not for consumers in the U.S. and Europe. They might have to pay way more for imported bras, toys and electronica. Be careful what you wish for!

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