The RMB Has Moved, Now How About Those Other Things

The RMB has moved, sort of. At the time of writing the exchange rate was 6.79 RMB/$, from 6.82 about a week ago. Or to put it another way, the wages of the average laborer at the Foxconn plant in Shenzhen rose from 293$ a month to 294.5$ a month.

Of course perhaps there is more to come, but will that make any difference? Some things to consider:

1. China is going to be making 75% of the world’s exports for at least the next 10 years: Yes its true that some production capacity is being moved to south Asia (though often in factories with Chinese investment), but most South Asian economies don’t have the infrastructure, the labor force, or the economies of scale to compete with the Chinese juggernaut. A change in the value of the RMB will at most make a glacial change in the speed at which higher living standards in China negate the competitive advantages of the country.

2. The cost of Chinese goods aren’t changing significantly: From 2000 to 2004 the price of exports from China were falling by 1% a year, and their final cost in the US was falling by 1.2% a year. From 2005 to 2008 the price of Chinese goods were inflating 3% a year – at its height 6% a year – but final costs still fell by 0.7% (UBS numbers). Price inflation will do nothing to cut into demand.

3. Chinese people, and corporates, still like to save: One of my favorite moment’s from last years stimulus package, was when the boss of AVIC – the state-owned aircraft producer who had recently took out the largest loan in Chinese history – admitted that he had no clue what they were going to spend the money on. It points to one of the big flaws in the Chinese banking system – corporations all keep a large stockpile of cash, because they never know when money will be tight and when money will be easy. For SMEs, which make up 60-70% of GDP, its even more serious, since banks never give them loans – most will admit to working in all cash. This is the source of the Chinese savings glut, and it won’t change one bit by revaluing the RMB. Chinese people similarly need to save for houses (since renters rights are non-existant), health care (since health insurance is non-existant), and retirement (since pensions are nearly non-existant), an increase in the value of the RMB won’t change that.

4. Chinese people are buying Chinese goods: One thing the Chinese government did recently to try to get Chinese people to spend more was provide a subsidy to rural people who wanted to buy home appliances. The program was massively successful, but had one catch – the subsidy was only valid on select Chinese goods. This problem extends to almost any area where developed countries could be competitive with Chinese manufacturing – electronics are slapped with 30% tariffs, luxury goods with near 50% tariffs, cars made inside China have to be made in a joint venture, financial services companies are still mostly blocked, China’s policies towards foreign technology runs from the covertly hostile to the overtly hostile. China talks a good game when it comes to protectionism – and they can get away with it because Western countries are often openly protectionist – but it is still a giant problem in the country.

The best thing that could happen from the RMB move is that the RMB stops being a political issue, so that America and all the other G20 countries can start focusing on the structural and political problems that are keeping the Chinese from spending. Of course if America is going to talk seriously about protectionism, it might have to look at its own tendencies in that regard, which is much more difficult than just shouting about the currency.


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