The Chinese RMB, US Politics and what it means for you

As the Chinese government slowly, ever so slowly, allows the RMB to strengthen against the US Dollar, US politicians cheer from the sidelines—patting themselves on the back for being able to influence the Chinese monolith. Yea, right.US politicians have about as much influence in China policy decisions as the does the Dali Lama—that would be zero to none, in case you didn’t know. If anything, their ignorant grandstanding and annual calls for China’s head on a platter over human rights and artificially high currency valuations probably push the proud Chinese bureaucracy the other direction.But in the fight over a more accurately valued RMB the US politicians have an unlikely ally. Chinese financial analysts agree too that this is the best move for the Chinese economy in the long run. The problem for US law makers, who think in 2, 4 and 6 year cycles is that the Chinese think in terms of 5 year plans (at the shortest) and dynasty and legacy building on the long end. This means that there will be continued movement in the RMB, but at a paltry 3% a year. At most.But since must of us live in the short run, this change is immediately felt on the bottom line. For Chinese manufacturers everything they export is now 3% more expensive each year. This increase is a threat to their competitiveness at a time when India and Vietnam are competing for more and more of the labor intensive Chinese market.Logically then, for you, the mid to small US manufacturer or distributor, this means that everything you buy from China is going to be at least 3% more expensive each and every year—even if all other variables are held constant. And, unfortunately those other variables are not stagnant. Interest rates in China are being pushed up by a desire to limit credit and cool off growth (11% this year). That means that available cash for factories financing projects is increasingly limited. In addition to money, resource materials such as oil, copper, steel and labor prices are all on the rise (some due to market forces, some not).While these increases in cost are real, China is in no way pricing it self out of the world market for labor intensive production. Rather manufacturing is moving inland—out of the cities and into the undeveloped Chinese countryside. China still has an infrastructure that better than Vietnam’s or India’s and a government that is committed to continued, but stabilized, growth of the Chinese economy—with or without the support of US politicians.