Home > Uncategorized > How China Boosts Its Manufacturers By Ripping Off Households In 3 Different Ways – Business Insider

How China Boosts Its Manufacturers By Ripping Off Households In 3 Different Ways – Business Insider

If Beijing wants to rebalance, and it decides anyway to devalue the RMB, it just means that Beijing must raise wages or interest rates all the more in order to force a real increase in the growth rate of household income. Any improvement in Chinese export competitiveness achieved by devaluing the RMB, in other words, will be fully made up for by a deterioration in Chinese export competitiveness caused by rising wages or rising interest rates.

This is ultimately what rebalancing means. One way or another as China rebalances it will lose competiveness abroad because it must raise the cost of production in favor of household income. In exchange, however, China’s domestic market will become a bigger source of demand as Chinese households benefit from rebalancing. Over the long term Chinese growth will be much healthier and the risk of a Chinese debt crisis much reduced, but over the short term, unless there is an unlikely surge in global demand, China cannot both rebalance and improve its trade performance.

How China rebalances, then, will mainly reflect domestic priorities and political maneuvering. If China revalues the currency, it will disproportionately help middle- and working-class urban households – for whom import costs tend to be important – and will disproportionately hurt manufacturers whose production costs are primarily local, e.g. most manufacturers who are not in the processing trade.

If China however chooses to raise wages, it will disproportionately help urban workers and farmers and will disproportionately hurt labor-intensive manufacturers, who tend mainly to be small and medium enterprises.  And finally if China raises interest rates it will disproportionately help middle-class savers and disproportionately hurt large, capital-intensive manufacturers.

These three strategies, in other words, have broadly the same impact on trade competitiveness, although in each case the winners and losers within China will be different. This is why we should not be overly concerned with what happens just to the exchange value of RMB. As long as China genuinely rebalances its economy, which will be a painful process no matter how Beijing chooses to manage it, Chinese export costs will rise and in the short term Chinese goods will be less competitive in the global markets (although as rising domestic costs force China to increase productivity and innovation, over the longer term they will actually boost Chinese competitiveness).

Which path China chooses to follow should be seen by the world primarily as something that affects the way the costs and benefits of rebalancing are distributed domestically. For the sake of more sustainable and equitable long-term growth, and in the interests of economic efficiency, it is almost certainly much better for China and the world if Beijing raises interest rates than if it revalues the RMB, but since raising interest rates is likely to be opposed by the very powerful groups that benefit from excessively cheap capital, Beijing may instead put more focus on raising wages, which comes mainly at the detriment of economically efficient but politically weak small and medium enterprises and service industries.

China urgently needs to rebalance its economy, both to avoid the risk of a domestic banking crisis and to reduce its excessive claim on global demand.  How it chooses to do so, however, should not be constrained by too much focus on the value of the RMB. The exchange rate is only one of the mechanisms, and not even the most important, that will determine the price of Chinese goods abroad. It is domestic politics that will determine the form in which the rebalancing takes place, but as long as rebalancing occurs, the world should not overly emphasize the role of the currency.

Do not expect, in other words, that China will steal export share from the rest of the world while rebalancing its economy by depreciating the RMB.  Increasing competiveness in export markets is not compatible with rebalancing. As China rebalances it has no choice but to reduce its export competitiveness. Even if Beijing devalues the RMB, this will not improve Chinese competitiveness abroad because Beijing will have to raise wages or interest rates all the more.

via How China Boosts Its Manufacturers By Ripping Off Households In 3 Different Ways – Business Insider.

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