Operating a fixed exchange rate system has only a little time advantage.
China’s effort to devaluate the renmimbi is buying time for Chinese government officials, only to figure out what to do next. However, this strategy will not last as much as they expect it to do so. The recent monetary moves speak more of Chinese officials’ fears than about the actual competitiveness of the Chinese economy. When it comes to exchange rates, what really drives investments and business insights is the real exchange rate, rather than the nominal exchange rate –which is what China is manipulating currently. That implies two things: first, it is a matter of time for value of commodities to adjust; and second, every conclusion on any effect must revise currency counterparts. Regarding Chinese competitiveness against U.S., two facts shed light onto what China is fearing to happen: big increases of US labor productivity –which apparently is not happening-, and at the same time, a slow down on unit production costs within the U.S.
Data on labor productivity matters:
In the case of the United States, preliminary data on labor productivity for the second quarter of 2015, show American workers are working harder instead of smarter. Compared to the second quarter 2014, labor Productivity increased 0.3 percent, “reflecting increases in output and hours worked of 2.8 percent and 2.6 percent, respectively”, reported the U.S. Bureau of Labor Statistics on August 11th 2015. Among nonfarm business sector, labor productivity increased at an annual rate of 1.3 percent, while output did so by 2.8. Hours worked increased by 1.5 percent. By looking at these data, anyone would conclude that United States is not experiencing big jumps in labor productivity, which should not scare anybody including China. Honestly, and although China’s workers are far away from U.S. labor force productivity, the U.S. sluggishness nowadays should have deterred Chinese Officials from devaluating the renmimbi. Therefore, there are no reasons to believe Chinese officials expect US labor productivity to jump.
Furthermore, just consider that labor productivity increases with changes in technology. Job site implementation of new technologies make workers more efficient per hour which increases the measure. These changes in technologies may include managerial skills, organization of production, and characteristics of the labor force, amongst others influences. Comparing China versus United States in this regard should give Chinese Officials confidence in their cheap labor leverage, while acknowledging the need to in developing competitive technologies.
Manufacturing jobs will move out from China sooner than later:
On the other hand, what could have encouraged Chinese officials to devaluate their currency is the actual trend in US labor cost. Preliminary data on unit labor cost in the nonfarm business sector show a modest increase of 0.5 percent in the second quarter. That is almost nothing and everything. On one hand, it could mean a starting trend that could allow for shoring back from China manufacturing jobs. One must acknowledge that it is too soon to assert such a prediction, but it is enough to believe that in the same way manufacturing jobs were exported from the U.S., the same way those jobs could be repatriated. Even though it is still very expensive to manufacture within the United States (Unit labor cost increased 2.1 percent over the last four quarters), it is also true that those manufacturing jobs have never disappeared from the US Economy. They are, if you will, transitorily in China. Those jobs are still part of the US chain of production. In fact, that is what Chinese official are certain and resolute to avoid by setting the nominal exchange rate of the renmimbi. The message from the Chinese currency moves is the following: manufacturing jobs will move out from China sooner than later. The question is, who is going to take over them. It makes sense to shore them in to the United States since those jobs are often commanded from US Big cities. Just look at an iPhone: designed in California, assembled in China.
Categories: Macroeconomics, Policy
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