The other shoe has fallen –China announced today that its currency would be priced based on a basket of currencies rather than exclusively on the US dollar. The net result is that Chinese goods should become more expensive. But this broader pegging announcement has been heard before and the Chinese manage to wriggle free of currency appreciation [temporary measure or only certain industries or the basket of currencies mime the US Dollar themselves]. Just before the announced gradual revaluation, China had already seen substantial wage increases due to labor agitation [33% now 70% more in Fall for many electronics worker]and 20-30% again in the auto sector [Toyota and Honda so far]. Bottom line is that in key sectors like technology and autos plus other businesses using China as a key supplier will see continuing cost pressures. Given the competitive environ for both industries [technology sees invasion of new players in markets Apple and Google have pioneered while all automakers are scrambling for a declining total new car market] expect earnings in both sectors to see downward pressure. Retailers that are also tied into low Chinese import prices will also be pressed to the extent they cannot pass on Chinese price increases to their consumers. In sum, expect major downward adjustments to associated stocks.

Update: Japanese Nikkei business paper sees similar pressures:

A recent editorial in the Nikkei business daily highlighted the issue, noting that demands by Chinese workers for higher wages marked a “sea change” in China’s low-cost production model. “The situation poses a major strategic challenge to all manufacturers that have set up production in the country to capitalize on its low labor costs,”

Update 2: July 5th, 2010: A NYTimes article examines how rising labor costs in China and the projected rise in the Chinese currency will effect Apple and other large technical producers like Dell, HP, and others. Though labor costs are small in the assembling of final products, about 7%, many of the parts and chips used in Apple iPhones and others products are also Made in China and subject to rising labor costs too. Bottomline, Made in China means rising costs.

Original post June 19, 2010