Reshoring, Offshoring and China's devaluation of yuan: How this shakes out for US companies.
The theme for our quarterly newsletters this year has centered on "Offshoring vs. Onshoring." We've highlighted different aspects of Reshoring topics and their place in the economy 'globally' and manufacturing 'specifically'. With China's recent decision to devalue the yuan, or renemibi , at 6%, our focus now shifts on how this will effect manufacturers at home and abroad. Currency devaluation has far reaching consequences that will affect the future of free trade and the realignment of economic structures for manufacturers.
China has decided to devalue its currency, consequently causing a shift in the global market. The result of these actions remains to be revealed in the days ahead. However, China's devaluation of the yuan can be seen as the initial phase of forthcoming strategic economic actions that will significantly affect the United States and the rest of the world. So, how is this relevant to our topic of 'Onshoring versus Offshoring'?
Namely, exports of China's products will appear to be cheaper for the United States as we try to purchase them. This will increase demand for China's products and create a surge in China's exports. The next major effect of devaluing China's currency targets imports and the buying habits of the Chinese populace; from businessmen to blue collar workers. The devaluation makes it more expensive for China to buy imported goods while simultaneously increases expenses for other countries to sell their products to China.
Essentially, this move is an economic wall
that de-incentivizes trade with the world.
The Chinese government anticipates that the currency devaluation will also improve their GDP. China's leader has insisted that their country's GDP for 2015 increase to 7%! With an already overextended economy, inflation is likely to result in Chinese workers finding it more difficult to put food on the table.
The ongoing theory regarding China's currency devaluation is that as exports become more competitive and imports become more expensive, the Chinese government should see higher exports and lower imports, resulting in quantifiable improvement in their country's economic situation.
So, how does this effect Onshoring? In a previous newsletter, we quoted the recent MarketWatch story, that: "Record numbers of manufacturing jobs [are] returning to America." This information is depicted in the following infographic :
As we look at the chart on escalating wages we can easily see how inflation in China will push wages up as a result of the currency devaluation and will become an even greater driver for Onshoring decisions. We'll take a closer look at China's current manufacturing infrastructure in our next issue - until then, let us know what you think in the comments below!
CHINA'S CURRENCY DEVALUATION Part 1:
Article courtesy of Art Nicolet