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Thursday, September 8, 2011

Is the yuan really so undervalued?

According to the Big Mac Index from The Economist, the answer would be no...

 The wages of China bashing

Sep 7th 2011, 18:07 by R.A. | WASHINGTON
YESTERDAY, Mitt Romney, Republican candidate for the presidential nomination, released his plan to invigorate the American economy. It's mostly a collection of Republican orthodoxy, with one notable exception: Mr Romney declared his intention to get tough with China and push for a revaluation of the yuan against the dollar. The Obama has been reluctant to apply heavy pressure on China toward this end, despite populist criticism of the yuan's valuation from the left and the right. In that sense, the policy seems like a useful political weapon. As a means to boost the economy, however, its potency has significantly deteriorated.
Kevin Drum wisely points to our Bic Mac index in showing that the yuan may no longer be heavily undervalued.


That's hardly the final word on the matter, but two trends have contributed to a meaningful shift in China's terms of trade. One is change in the nominal dollar-yuan exchange rate. Since China resumed a managed appreciation in June of last year, the yuan has risen over 6% against the dollar.

The other is growth in Chinese labour costs. Mary Amiti and Mark Choi note that manufacturing sector unit labour costs in China likely rose by over 4% in 2010, contributing to a sharp rise in Chinese import prices in America. Meanwhile, yesterday's Financial Times pointed out that rising Chinese wages are already leading some manufacturers to move production outside of China:
Last week, Jonathan Anderson, a UBS economist, released a report after crunching the numbers of the US and European Union’s import data for the first half of 2011. He found China’s light manufacturing share is starting to decline from more than 50 per cent to about 48 per cent. The beneficiaries include Bangladesh (up 19 per cent in exports to the US) and Vietnam (16 per cent). The first half of 2011 “looks a pretty convincing turning point”, says Mr Anderson of a shift in labour-intensive manufacturing to south-east Asia. India and the Philippines, by contrast, which should be “natural destinations” for labour-intensive investment, appear to be sitting out the action, he says.
More yuan appreciation would in many cases simply accelerate the relocatin of labour-intensive manufacturing to other countries. It might also lead to more internal adjustments in China to raise domestic consumption, but as Michael Pettis frequently points out, the exchange rate is hardly the only tool China uses to encourage investment-led growth.
Mr Romney's China talk might be good politics, but America's economy will need much more than a floating yuan to get back to full employment.




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