By on June 22, 2010

It stands to reason that Japanese car makers would rejoice over rising wages in competing China and over an appreciating Chinese currency. Rising wages make production there more expensive, a rising Yuan makes exports more expensive. Both should give the Japanese more breathing room. That reasoning is falling by the wayside. The Nikkei [sub] reports that these developments pose ”serious threats to Toyota’s profitability in China, strategic challenges that other Japanese companies must also deal with.” Just goes to show that you need to be careful what you wish for. And wait who else should worry.

As chronicled here, Honda and Toyota had to stop the lines because they were left partless by strikes at some of their parts makers.

Over the weekend, the world joined a chorus of “ding-dong, the peg is dead” , after – in a lead-up to the G20 summit – China announced it would be a bit more lenient with their Yuan/Dollar valuation. Today, the USD/CNY official mid-rate stands at 6.7980 vs 6.8275 yesterday, a breathtaking 0.5 percent “bounce.”

So why would that bother the Japanese? Says the Nikkei: “The price of new cars in China is similar to that of Japan. This translates to fat profit margins in China — now the world’s largest auto market — thanks to lower production costs. But rising wages are likely to reduce those margins, warned a Toyota executive.”

That’s just the beginning. Many parts used in worldwide production are made in China. Rising wages and a stronger Chinese currency make those parts more expensive abroad. This is not just a Japanese concern.  What’s more, a stronger Yuan makes it cheaper for Chinese companies to import the latest manufacturing machinery from abroad, strengthening their competitive posture in the long run. Students of economic history will remember Germany and Japan.

Foreign automakers with joint ventures in China have short term reasons to be worried.  Exports amount to one third of China’s GDP. A stronger currency and higher wages make Chinese exports less competitive in international markets. A more frigid business climate will most certainly result in a cooling-off of China’s red-hot auto market.

“The booming sales that continued until March have gone,” said a Toyota dealer to the Nikkei. “Sales growth could slow further if falls in exports choke economic growth.”

If you think that’s a great problem for Toyota to have, think again:  Guess who’s also unhappy about higher wages and a stronger currency in China? General Motors. GM sells more cars in China than in the U.S. The Europeans can take a more sanguine posture: The Euro had dropped so much in value against major currencies that they can shrug off wage increases and an 0.5 percent rise in the Yuan. Volkswagen will “significantly exceed” last year’s results, mostly because of China. One country’s depression is the other country’s euphoria.

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6 Comments on “Who’s Unhappy About Higher Wages, Stronger Currency in China? The Japanese. For Starters...”

  • avatar
    John Horner

    Higher manufacturing worker’s wages will also increase the size of the consumer product market in China. But yes, everyone who is currently benefiting from “how things are” will decry any changes.

    Repeat after me: The crushing work schedule of Chinese manufacturing workers and the massive trade surplus China enjoys with the rest of the world are good for everyone involved. Say it to yourself enough times, and you might just believe it.

  • avatar

    On the other hand, car companies will make more profits per car if Chinese currency is appreciating.

    Lets say GM sells cars in Yuans and makes the equivalent of $2,000 per car in 2010; if Yuan increases by 20%, GM will make 2000 * 1.2 = $2,400 in 2011.

    Also if purchasing power increases in China, Chineses will have more money to purchase cars.

    The only entity that is screwed is the US Treasury; who will then purchase its Bonds?

    • 0 avatar

      The “Yuan appreciation” is for the mathematically challenged.

      As I said, it went up 0.5%. As a political window dressing. Beijing bankers I talked to today (both American and Chinese) do not expect more than a 2 % increase in value for the year. The big increase is against die Euro, due to Euro weakness.

      Should China rearrange its “basket of currencies” (which is currently pretty much 100% dollar weighted) and increase the Euro weight, THEN it becomes interesting.

      A 20% increase is nowhere in the cards.

      What is also notable is that to maintain the dollar peg, China had to buy lots of dollars. Which was one reason that the dollar went high the minute they initiated the peg. If they rearrange the basket, there are less dollars to buy, and the value of the U.S. currency will go down. It already has depreciated against the Euro for the last few days.

    • 0 avatar

      Some calculate that the peg is worth at least 50 points. Not only have the Chinese bought dollars to maintain the peg, they’ve done it by monetizing the yuan, resulting in inflation.

      For another interesting take (I’m not associated with Schiff in any way) look here:

      An interesting point to ponder: we export inflation to China via the peg. The Fed prints dollars like there’s no tomorrow, but in spite of the threat of US monetary inflation, we have witnessed price deflation in certain areas, and some argue that this may even spread as consumers stop spending. Interesting times, these.

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