Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)
China announced last week that they will no longer peg the yuan to the US dollar. Instead, they are going to control the currency against a market basket of the currencies of countries they trade with. This is what Singapore did a decade or two ago.
This is at best a stop gap measure. It complicates the task of the Chinese government in setting exchange rates. Just because it’s more complex, it increases the credibility of those who call the Chinese currency controls “manipulation”.
China really should just let the currency float. Apparently internal pressures from their business community are stopping them from doing that.
So what does this mean for people sourcing in China? It’s probable that the Chinese currency will get stronger against US dollar. But even that isn’t certain. They tied the value of the yuan partially to the value of the euro. If the euro were due to collapse due to fiscal problems in its “club med” (Spain, Italy, Greece) countries, the yuan could actually weaken against the dollar.
So, what happens to your costs if the yuan were to appreciate, say 10%? Would the price for your Chinese product go up 10%? Probably not. The answer depends on two things. First, what fraction of the manufacturing cost of the product is Chinese? You do know the answer to that question, don’t you? You should.
In assembled products, it’s rarely 100%, because a lot of the components are imported.
Second, how competitive is the market for the product you are buying? If there’s a lot of competition, sellers can’t always pass on cost increases to buyers.
I also expect change will be slow. It’s more likely that the recent labor militancy will have a larger and more immediate effect, particularly on the price of higher-technology products. More on that in my next post.
Thanks, Dick.