The World Bank released its latest Quarterly Update on China’s economy on Friday (for disclosure's sake: I’m the lead author). At the press launch, there were a lot of questions about the recent wage hikes in several foreign-owned manufacturing companies and the possible concerns these have triggered among many about possible loss of competitiveness and/or a wage-inflation spiral. There were also, as usual, quite a few questions about the exchange rate.
Meanwhile, the People’s Bank of China over the weekend announced the plan to re-introduce more flexibility in the exchange rate regime, after almost 2 years of a de facto peg to the US dollar. This is likely to set the stage for a stronger exchange rate over time.
In this blog post I summarize our main conclusions and views, including our fairly sanguine views on the implications of the wage increases and our quite positive assessment of developments and prospects generally. I would argue that the timing of the move on the exchange rate suggests that China’s authorities broadly agree that, overall, the outlook on exports, growth, and competitiveness in China is fairly good.
In a later post, coming out in a few days, I will focus on the medium term scenario that we did as background work for this quarterly.