What Was That About Yuan Flexibility?

Hey yeah, that’s what I said (BEIJING (AFP) –  “A sharp revaluation in the yuan would trigger mass factory closures and job losses in China”). So China is talking about raising the minimum wage.  Sure, great plan, but it will have the same effect as far as factories are concerned.

Trying to make it all compute.

If they raise the minimum wage here, it will take the 2-3% profit margin that most of these factories have and put them somewhere close to zero. Here’s an economic reality check: If you run a business, and it makes no money, why run the business?  Simple, you say, just raise the prices. Wellll, as long as the world doesn’t mind a 2-3% increase in their cost of living that should be fine. Still, I think Joe consumer who just wants affordable clothes for his 3 kids and something under the Christmas tree might think that bites a bit. 2% of income for a household that earns $60,000 per year is $1,200. I’m sure everyone will get a raise to cover that. Or maybe Obama will just cut everyone another check. Ha-NOT.  Not to mention the fact that until you have tried to do business with some of those big-box stores do you really appreciate the meaning of the term “cut-throat business dealings”. They will contentedly bleed manufacturers to death.

So here’s what will happen when the Chinese minimum-wage goes up. Factories will close in China and move someplace else. Malaysia, the Philippines, they will go where they can and still make money, even if it’s only 2-3%. They will NOT return to the U.S. or Canada, or the U.K., or anywhere in Western Europe. Maybe the Eastern Europe countries or countries in Africa, if they can get their governments stable and control all the corruption. I personally think it would be cool to start a factory in, say, Albania, but that won’t happen until companies don’t have to pay protection money to the mafia. #1 requirement for business – a stable government that doesn’t put a strangle-hold on companies.

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