What is a Fair Value for the RMB -- and What Does it Mean for China Sourcing?

Supply Chain Digest recently ran a feature highlighting an academic paper that suggests China should let the RMB appreciate 10% relative to the dollar. The story suggests that "if such a move were to happen, it would effectively increase the price of Chinese imports to the US by 10%, in some cases eliminating the savings attained from offshoring there. However, suppliers in China could reduce prices to offset the currency swing, perhaps aided by government subsidies." Today the RMB (or Yuan, as it's also called) only partially floats on the open market (it's like a buoy that floats up and down with the tide while remaining firmly anchored to the floor of the Chinese Central Authority economic ocean).

For companies that do significant export business with China, further calls for a more freely floating RMB should signal the alarm that the savings from China sourcing has the potential to continually erode, year over year. This is especially true for companies that are sourcing products with significant labor and value-added inputs relative to raw materials, which Chinese companies are importing. Thanks to a stronger RMB, the price of these materials will be offset by lower purchasing costs; however, the potential for price increases to offset the total cost savings gained by sourcing from the region could be enough to tip the scales in favor of exploring domestic or other global options.

Still, there's no certainty that China will support a stronger RMB any time soon. As SCD opines, "An appreciation of the Yuan likely would hurt exports and perhaps cause more manufacturing job losses at least in the short term -- something the government is very wary of, fearing social unrest." Which to me is further proof of only one thing: China will do what is right for China -- and couldn't care less what the world thinks of it. As I've said before, it's important in situations like this to remember that Sun Tse was Chinese.

- Jason Busch