Mr. Zhang's pay raise could tank the dollar

All the Congresscritters who’ve been squawking for China to stop “suppressing the value of their currency” versus the dollar could be about to get what they want – good and hard.*

The reason is one we’ve touched on before – rising wages in China.  Now the New York Times reports

No reliable figures for average wages exist; the government’s economic data are notably unreliable. But factory owners and experts who monitor the nation’s labor market say that businesses are having a hard time finding able-bodied workers and are having to pay the workers they can find more money.

The causes:  Between the government’s one-child policy and the fact more young people are seeking higher education before entering the workforce, China has become desperately short of young able-bodied people who can work 11-hour days and don’t mind living in factory-owned dormitories. 

The result:  A worker at a bicycle factory named Zhang Jingming getting a 10% raise after just six months.  And a manufacturer of leather jackets raising wages nearly 50% over the last three or four years. 

The impact:

For decades, many labor economists said that China’s vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time, this reasoning went, that wages in this country would be stuck just above subsistence levels. As recently as four years ago, some experts estimated that most of the perhaps 150 million underemployed workers in the countryside would be heading to cities.

Instead, sporadic labor shortages started to appear in 2003 at factories in the Pearl River delta of southeastern China. Now those shortages have spread to factories up and down the Chinese coast, specialists say.  

All of this means that a critical inflection point in the yuan-dollar relationship could come sooner rather than later.  Recall our post from earlier this month, in which DR Australia editor Dan Denning spotlighted a book called “The Turning Point in China’s Economic Development.”  Key passage:

"China has or is fast approaching reached the turning point in its
economic development, at which 'surplus' labour from agricultural
employment in the countryside ceases to be available to drive the
growth of the modern economy; so that labour becomes scarce and
valuable; forcing large real wage increases and real exchange rate
appreciation; which generate structural change towards more
capital-intensive and technologically sophisticated industrial
structure at the relative expense of labour-intensive manufacturing
and agriculture; and changes fundamentally the character of China's
interaction with the international economy."

The Times piece hints at some of the potential impact:

…higher wages in China are likely to lead to higher prices in the United States — at the mall, at the grocery, even at the gas pump.

Chinese companies are already passing along some of their higher costs to overseas customers. Prices for goods from China, after years of gradual decline, have risen 1.2 percent since February, according to the Labor Department. July’s increase was the biggest yet: 0.4 percent compared with June. Chinese companies and contractors are also passing on the cost of the rising value of their currency, the yuan, up 8.8 percent against the dollar in the last two years.

But there’s far more reason to worry about Mr. Zhang's growing paycheck than the end of “everyday low prices.”  Dan made it clear in our original post: The end of cheap labor in China spells doom for the world’s reserve currency:

"In other words, it identifies the natural economic point at which it makes sense for Beijing to allow the currency to appreciate.  This is all sorts of bad news for the dollar. You're really talking a major body blow, maybe even the coup de grace for the greenback, with this kind of structural revaluation of China's currency.”

Bottom line:  The evidence is coming in quickly; this “natural economic point” could hit us a lot sooner than anyone expected.  Wonder what Senators Schumer and Graham will say then…

*Apologies to the Bard of Baltimore.  The paraphrase was too good to resist.