This weekend’s announcement by the Chinese government that it would loosen the peg between the US dollar and China yuan has given global stock markets a significant boost today. But labor unrest, particularly in the auto manufacturing sector, could constrain the effect of the government’s action.
A strike against a parts supplier to Toyota Motor Corp. (NYSE: TM) was settled over the weekend, following on the settlement of several strikes against Honda Motor Co. (NYSE: HMC), including one on Friday against a Honda lock manufacturer.
The local government reportedly intervened in the Toyota strike, according to
The Wall Street Journal by “nudging” the workers to call a halt to the stoppage. There were reports that the government sent in large numbers of police and that some workers were beaten and had to be taken to a hospital.
If that is so, that means that the central government is growing more concerned about the labor actions and could become increasingly willing to wield its power to ensure that workers stay on the job. In China, wages are mostly set at by the local government and vary from city to city. As news of a successful strike action spreads, workers in one city hear of the success and decide that they, too, are worth more.
Officially, there is exactly one labor union in China, the All China Federation of Trade Unions. The union’s role, as seen by many workers, is to ensure that there is a constant supply of cheap labor to support investments in manufacturing by foreign companies. Because the union does little or nothing to improve workers’ lives, they have decided to take matters into their own hands.
Even as these strikes spread, the People’s Bank of China announced on Sunday that it would allow more flexibility in the exchange rate for China yuan. On Monday, the yuan surged out of its very narrow two-year old band of 6.82-6.84 yuan to the dollar to around 6.80.
As the yuan appreciates, a Chinese worker’s paycheck doesn’t go as far. Chinese goods become more expensive on the international market, and the country’s trade balance edges down. The government is trapped with higher-priced goods based on yuan appreciation and higher labor costs to produce those goods. This squeeze will eventually trickle down to average citizens who are very likely to react in greater numbers and with greater impact than the still isolated workers strikes that are happening now.
That is what the government fears most, and that is what will influence both how it decides to handle the strikes and how much it will let its currency float. At this point, Toyotas and Hondas built in China will cost more to build and the companies may choose to eat the costs in an effort to maintain market share. But they can’t do that forever.
Neither can the Chinese government allow the currency to float freely. The last time that happened, in 2005-2008, the yuan appreciated 20% and would have gone higher if the government hadn’t stepped in. The government hasn’t provided much detail about its new policy other than to say that a return to a managed float means only that the exchange rates will move gradually and that the moves could be down as well as up.
Labor unrest over low pay could get really ugly if the China currency appreciates significantly. The Chinese government won’t let that happen, and today’s euphoria could easily be reversed.
