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The New Economy

Currency move latest sign of China's transformation

China is transitioning away from being the world's discount manufacturer. But it will have to loosen its currency even more to avoid the pitfalls of development.  

By Scott BoydContributor / April 16, 2012

An employee counts US dollar banknotes at a branch of Huaxia Bank in Shenyang, Liaoning Province, in this 2010 file photo. China took a milestone step in turning the yuan into a global currency this weekend by doubling the size of its trading band against the dollar. It will need to liberalize the currency further to help transform its economy.

Sheng Li/Reuters/File

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China is responsible for about 20 percent of total global manufacturing and the ubiquitous “Made in China” label can be found on an astonishing array of products. But its days as the world’s discount manufacturer may be coming to an end. This weekend's loosening of controls on China's currency is the latest sign of the transformation under way.

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China is moving inexorably up the value chain. It boasts some of the most advanced manufacturing firms in the world. As the level of factory and worker sophistication has grown, so have salary expectations. And the pool of workers once thought inexhaustible is, in fact, proving to be limited. Throw in higher fuel prices to ship its good overseas and it's clear that the factors that tilted in China's favor during its dramatic first phase of development are now tilting away from it in its second phase.

While this might help North America’s beleaguered manufacturing sector eventually, at this point it appears other emerging nations are reaping the main benefits from the change in China. Over the past few years, for example, several US toy companies have turned to Vietnam and Indonesia to produce more of their products. Auto parts manufacturers have likewise increased their presence in India where a thriving auto industry continues to build momentum. Even Foxconn, the manufacturing giant that makes products for Dell and Apple, is in the process of expanding its operations in India and Vietnam. These moves will come at the expense of plants the Taiwan-based firm has contracted in China.

The shift is understandable. Chinese wages are going up – and will continue to go up by 19 percent a year, according to a report from Credit Suisse Group AG.  That's explosive growth that's almost double the expected rate of growth in the economy. As a result, Credit Suisse forecasts, wages – which stood at 50.5 percent of China's gross domestic product in 2010 should rise to 62 percent of GDP by 2015.

That's not necessarily bad for China. Richer Chinese will buy more Chinese goods. Credit Suisse expects private consumption, which accounted for 35.6 percent of GDP last year, to reach nearly 42 percent by 2015.

Another reason wages are rising is that the pool of workers is shrinking and companies are having to compete for skilled workers. The old model of factory owners having the upper hand over migrant workers fleeing rural poverty and willing to take on any task at any wage is disappearing. The advantage is slowly turning to the worker.

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