What Does an Appreciating RMB and Rising Labor Costs Mean for China’s Export Industry?

There has been a great deal of doom and gloom in recent years, asserting that China’s export industry, the mainstay of its rapid economic growth for the past three decades, was coming to an end. Much has been said for a move of manufacturers and supply chains to more cost-effective regions such as Vietnam, Indonesia and now even Myanmar. To look at rising labor costs and the appreciating Renminbi by themselves would leave one feeling like a dramatic change was coming to the role which China currently plays in the world, there are several reasons why this is not so, at least not yet.

Contrary to political rhetoric in the West, the Renminbi has actually risen dramatically over the past year, diminishing China’s current account surplus, with Chinese produced products becoming more expensive while Western products have been made cheaper for Chinese consumers. At the same time, rising labor costs have further taken a bite out of margins, rising at an average of 22% in 2011 across 21 of China’s 31 provinces. This is largely a calculated move by China to develop a more robust middle class, able to not just earn an income making products that the rest of the world consumes, but to be able to afford those products themselves, thereby giving China an economic driver that does not rely exclusively on export driven growth and foreign direct investment.

So, does a rising RMB and wage hikes translate into an exit from China? No. The reality is, that while other South East Asian countries like Bangladesh, India or Pakistan may offer cheaper labor pools, they lack the basic infrastructure required to facilitate a cost-effective move for the vast majority of products currently being manufactured in China, including roads, power and crucially, expertise. Having developed themselves into the world’s factory over the past thirty years, China possesses the expertise to facilitate a robust supply chain that is both rapid and reliable, saving critical lead times and cost. While neighboring countries such as Vietnam have often been touted as the next Asian Tiger, soon to become a rival to China’s manufacturing prowess, the reality is starkly different. With rapid inflation and crumbling roads,Vietnam has fundamental issues that prevent it from becoming a viable alternative to China.

While China edges its way up the value chain, the intrinsic advantages that are fueling this growth will continue to rise, while forward thinking businesses will take advantage of the rise of the Chinese consumer and, like many are already doing, find a place for sales in China in their business plans, thereby offsetting the increased costs with higher margin domestic sales.

What do you think?

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