With the doubling of wages at Foxconn (FXCNY.PK) factories in response to the suicide outbreak, together with major wage concessions at a Honda (HMC) plant in Guangzhou and continued strikes at other Honda plants, it looks like the Chinese state-industrial apparatus will be forced by bottom-up activism to make continued wage-concessions. This should increase the portion of domestic Chinese GDP that goes into workers' pockets, stoke domestic Chinese demand and therefore decrease the portion of Chinese GDP that is exported. I'm no FX specialist, but this has the makings of an effective devaluation of the yuan, most likely by some Chinese currency printing.
So is it really the most opportune moment for the US to launch into heavy sabre-rattling about sanctions should the government fail to devalue? De facto, it's getting ready to happen anyway. If we get hard-nosed about it, the Chinese government may just resist so as not to be seen as having devalued in response to US pressure.
Admittedly, right now we're positioned well to be pushy. The world-wide flight to quality has largely quelled voices calling for an alternate reserve currency in the near term. Lord knows it ain't gonna be the Euro for a few years, and the idea of the IMF cooking up its own currency is pretty improbable while it's busy supporting the ECB in backstopping the PIIGS. So the dollar it is for the moment, or gold for those who prefer that.
But, from a strategic perspective, it seems foolhardy to push hard on China right now when its own populace is driving it to do what we want it to do. There are plenty of tensions between Washington and Beijing, and between Bentonville and Beijing as well, and there are more to come. We should pick our battles wisely.
Disclosure: Index funds only
