Three Quick Thoughts on the Yuan …

Earlier this week, a colleague asked me what I thought were the top Spend Management implications for the revaluing of the Yuan. And here's what I had to say:

First, from a US import perspective, it is wrong to automatically assume that the revaluation will mean commensurate price increase. Certainly, some Chinese suppliers will try to pass along the entire increase. But the Yuan's rise also means that Chinese suppliers can now import raw materials more cheaply. So the rise in export pricing -- if any -- should correspond to the labor-related components -- not the raw material or capital equipment components -- of the finished goods you're sourcing. While this grossly over simplifies the argument, it's a point worth making with suppliers and partners in the region.

Second, don't assume this is a one time revaluation. Depending on which economists one listens to, the Yuan is still undervalued relative to the dollar by 5-30%. Since the Yuan is now pegged (in a quasi-sort-of-kind-of-back-channel-way) to a basket of currencies -- rather than just the dollar -- the chance for additional revaluations is still looming

Third, regardless of currency valuation, the labor arbitrage game will not last for ever. Eventually, China labor prices will approach parity with the West (sometime in the next 10-30 years, perhaps faster). Hence, companies who take a long view on China should consider the market an opportunity to sell into as much as an opportunity for export. Consider what Wal-Mart is doing in China as an example.

No doubt, there’s a number of other implications of the revaluation as well. But these three struck me as critical. What do you think?

Jason Busch

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