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Thursday, March 23, 2006

Chinese Competitiveness

There's an interesting article about Chinese competitiveness in the FT today. It is based on information provided by the Hong Kong-based Li & Fung trading group - one of the world’s largest trade sourcing companies. According to Li & Fung there has been:

an average 2-3 per cent increase in the once unbeatable China price its US and European clients were willing to pay. He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the renmnbi and higher oil and energy costs for the shift.

“China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region...Anything [sourced] from China has a higher inflation component than from other places around the world.

According to the Financial Times the principal beneficiaries of China’s rising prices have included textile and garment manufacturers in India, Bangladesh and Cambodia.

Now what might be happening here (since the price differential China can offer seems to be sufficiently substantial not to be affected by the comparatively low inflation China still enjoys. Well Brad Setser points us in one direction:

Actually, the market signals have changed a bit, at least on the export -side. Not because of the RMB's trivial moves against the dollar (even if China's government has now allowed the pace of the "crawl" to pick up). But rather because of the dollar's rally against the euro and the yen in 2005. Steve Johnson of the FT reports that China's real effective exchange rate appreciated by 13% in 2005.

So in 2005 Chinese exports actually lost competitiveness because of the dollar peg. That is one part of the story. The other part of the story is that China's labour market may well be tightening in the low value added end of the market, and this may see a migration of these sectors to places like Bangladesh, Cambodia and India, in search of ever lower prices. This does not mean that China itself may not be migrating towards higher value added activities where its comparative price advantage may still be significant.