Don’t hold your breath for the Yuan revaluation to slow Chinese export: EU and US consumers will pay for it

August 7, 2007

“Those who closely follow the mainland economy, the last few years have provided another interesting spectacle. Remember that the yuan has been strengthening gradually against the dollar, by 2% in 2005, another 4% in 2006 and at a 6% year-on-year pace so far this year. At the same time, Chinese rural migrant wages, which were rising leisurely at 3% to 4% per year at the beginning of the decade, are now shooting up by 10% or even 15% annually as factories come to terms with a dwindling supply of young, single farm workers.
This double-edged sword of an appreciating currency and rising labor costs should have imposed palpable damage on China’s traditional export sectors: toys, clothing, furniture, appliances and electronics processing. However, according to industrial earnings and profit statistics, overall light manufacturing margins have been as steady as a rock, with no signs of pressure so far.
Why? Because exporters simply passed on the costs to overseas buyers.”

In an essay for the Far Eastern Economic review (read the article here) “Jonathan Anderson, chief Asian economist at UBS, dispels common myths about the Chinese exchange rate and explains why yuan revaluation is the only remedy for China’s economic “whiplash.”