Mainland trade growth betrays yuan doubters
Once again, the commentators are lining up to declare the mainland's hopes of currency stability doomed. I don't think I have to name all the pessimists. Open any business journal and you will see it is the standard line. The yuan has 12 to 18 months before it collapses, they say.
The argument is the obvious one that the mainland's economy is faltering and that trade growth will now decline sharply as other Asian competitors take advantage of the cheaper production costs their depreciated currencies have given them.
So here is a simple question. Why, almost a year since the Asian currency collapse began, is the mainland's export growth still stronger than the rest of Asia? I have put the figures in the chart below on the basis of a six-month average, to smooth out month-to-month fluctuations, and in US dollar terms, because the US dollar is the currency of Asia's trade.
On this basis, the figures show the mainland's export growth in April at 12 per cent and the aggregate of the rest of Asia excluding Japan at only 0.5 per cent in March. Given the trends in countries that have reported later figures, the aggregate growth rate in April probably will be negative.
The numbers for the mainland are admittedly also down. They have declined from a peak of 26 per cent in June last year. But so high a growth rate could not be sustained indefinitely by a big manufacturing base and some slowdown was in any case inevitable in the mainland's Asian markets.
It won't do to attribute the relative strength in the mainland to the time it takes to shift export orders. This may apply to highly engineered machinery exports but we are talking mostly light consumer goods here. Orders can be shifted in a matter of weeks.
The key to it all is the value-added component in local currency, mostly labour. I was discussing it just last week with a friend who has several factories in the mainland turning out plastic rubbish (he won't like this description of it) and he estimated that labour cost was only 5 to 6 per cent of the retail price at which his goods sold in the United States.
All the rest is effectively priced in foreign currencies.
Components and raw materials are by far his biggest cost and this is all US dollars. Even his energy and transport costs are more sensitive to the US dollar than the yuan.
So does he care much that the yuan has strengthened against other Asian currencies? His Asian competitors in the same industry face the same US dollar costs. However, they suffer from banks so financially distressed as to be reluctant even to finance the imports of components for export industries and from local currency interest rates that have soared through the roof.
Why should my friend bother moving his production facilities to Thailand? Not only would he have these financing headaches but relocation would mean substantial dislocation of his business and he would have to start all over again figuring out which officials have to be paid off and which can be spurned.
He would also have to do this as a foreigner. He's comfortable where he is.
Of course, not all mainland enterprises have such low-value-added components in the local currency. The old and troubled heavy industries of the heartland certainly do not.
Their good fortune is that they are also not big exporters, and they have the light export industries of the coast to defend them from currency collapse.