FX Strategy outside the Euro Mess

FX Strategy Articles > Fundamental articles

Obviously all things Euro are front and centre for traders at the moment and rightly so. And hopefully FX Strategy members are profiting handsomely from the volatility – keep an eye on the daily video updates for lots of in depth advice.

Today however I thought we would take our fundamental thinking away from the Euro mess and look to other FX opportunities. For China observers such as myself the buzz around rising labour costs has been getting louder for some time. In the last 2 years, apparel manufacturers, who uprooted from countries such as the USA and Australia, shifting their operations to China have been complaining that costs in China are getting too high. In some extreme cases manufacturers have actually brought their operations back to their home country while the more common response has been to “head east” deeper into China where costs are lower.

For businesses looking longer term they realise pushing east is only a short term solution and hence other countries with lower labour costs are starting to win business that for the last 20 years has almost solely been China’s realm.

For those of you with long memories – remember all those cheap toys you used to play with as a child had “Made in Taiwan” on the bottom of them….. Of course now everything has “Made in China” stamped on them but the big macro question concerning this analysis is: Which country is next to snare the “Made in” stamp? And hence, which country’s currency is the next to be in demand?

Shaun Rein, founder of China Market Research Group, recently made a case for Indonesia to be the beneficiary in a paper titled: Can Indonesia Benefit from Rising Labour Costs in China? (He also has a soon to be released book: “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World”)

Rein’s insights included commercial bankers in Indonesia being inundated with work from garment and shoe manufacturing clients who are all moving away from China and relocating to Indonesia and even Cambodia.

The key takeaway is that China is no longer a cheap place to do business and with the Renminbi appreciating by 7% in the last year and under pressure to go further, coupled with high inflation means it’s not getting any easier for Chinese factories.

Indeed the Chinese government has a policy to raise the wage rate and increase social security benefits. In the past year over half of the provinces in China have raised the minimum wage, on average by nearly 22%. The government has also mandated for annual 13% wage rises across all provinces in the future.

[Of course this isn’t a bad thing for Chinese citizens’ having higher wages and is part of the shift from an export oriented economy to a domestically focussed consumption and services economy. Rein’s firm estimates that domestic consumption in China now accounts for 42% of the economy, up from 30% a decade ago!]

So which countries will benefit from China’s rising costs? Are those countries in Asia, or Africa, or South America? My thinking is Asia due to the massive organised populations of cheap labour. Vietnam and Cambodia are possibilities so you may want to familiarise yourself with their currencies – the Dong (VND) and the Riel (KHR). However given Indonesia’s massive population of nearly 250 million people, the Rupiah (IDR) may hold the greatest long term potential.

By Friday Fundamentalist, Published on 17th of November 2011
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