It is the tough time for Chinese gov to think hard to decide how to react to the market.
1. Cost of manpower definitely will increase, but not sure when to increase the wages;( It will definitely happen with indicators of the Foxconn&Honda issues. People need to have better lives. Chinese Gov would increase wages to stimulate the domestic demands to support the economy, which will be sooner not later, with the Euro heading down and potential heading up of the yuan. But increasing wages would make the margin of manufacturing down. Less price competitiveness and less export press down the economy.)
2. More pressure from USA and other countries to revaluate the yuan, while Euro is going down against USD and USA wants to export more to China;( Except to crack down the Inflation, I don't see any motivates for Chinese Gov to raise yuan. If Chinese gov decided to raise yuan that would indicate a big move to switch the main economy engine to domestic demands increasing but not more export or more investment.)
3. Inflation heads up.(Possibility of interest-increasing would be very high when CPI is up over 3% to cool down the overheating economy with more than 11% GDP in Q1 2010.)
All the possible measures would mainly lead the GDP down at the very beginning of the transition to Power Engine of Domestic Demands until which is in full speed. It would be worth while GDP is more than 10% and USA consumer demands is up. Chinese gov will have to think it twice if it is right now to fuel the domestic consuming engine before moving as the Europe is in austerity that may lead to several years deflation which will bring down part of USA's economy.
What is certain are,
1. Chinese Gov would not do another stimulus as large as that one in 2008-2009.
2. Export to Europe is going to be down, but still uncertain to USA.
Domestic demands? I believe Gov is starting to consider the wages raising which was reflected by current articles in Chinese main papers that means Chinese Gov has no 100% determination to do yet but wondering and watching. Uncertainty!
Disclosure: no positions