Everyone is feeling the pinch of the world’s economic issues right now- the U.S. is having a recovery that often seems to be happening in rhetoric only, and the eurozone is having a tough time stabilizing a currency that was just a few years ago a model of what was to come in the future of finance. I remember a friend telling me he was putting all of his dollars into the euro when the crisis was heating up in 2008- hopefully he moved them somewhere besides BP before it was too late. With all of those issues taking hold and holding on, it’s easy to look at China and think that they have it all figured out- but Reuters says that looks can be deceiving in that regard.

The yuan has long been kept stable by a system of controls that the Chinese government says are safeguards against wildly fluctuating currency swings- the U.S. and others say that the policies amount to currency manipulation. And while there had been hope in recent years that the Chinese government may change their ways and allow the yuan to appreciate, the recent problems in Europe have made that less likely- perhaps less likely than it was before the issues.

"China depends a lot more on Europe than the U.S. does," said Cliff Waldman, global economist for the Manufacturers Alliance/MAPI and a China expert.

Concerns about the Chinese yuan do not go so far as to expect a recession in the country, but merely point to the fact that the economic woes in the West do have a larger impact on the world’s finances. But other issues have an effect on what is going on in China. One of them is wage inflation. Companies worldwide, but many of them in the U.S., have been moving labor to China for decades. Recent strikes and rises in wages are wreaking havoc with cost assumptions for companies in the U.S., and that leads to rising prices even in a recession. The fact that China’s workers no longer want or need to work for less than they are worth will have an impact on the world’s manufacturing sector. To battle these concerns around they yuan, China has vocally called on a stop in real estate speculation and have pushed for Chinese residents to focus on buying China’s own products.

Both good things, in theory, at least for China. If it were the economy a few years ago and China was pushing back on real estate speculation and paying its workers more, that would probably be a more stabilizing gesture.

But the problem of Europe has amplified any changes in the way money works in China. China sells the yuan and buys foreign currency, including the euro. In a sense they are hedging their bets. The same way that U.S. hedge funds will buy long and short to minimize risk, China sells its own currency to help keep other countries interested in it keeping its value, or seeing it rise. It’s like one of the core arguments about why China will continue to buy U.S. Treasury bonds- they want the dollar to keep going up. All of that is pretty macro-level economics.

But what is day-to-day, on the ground is the outsourcing of manufacturing to the country, which seems to be coming under closer scrutiny:

"Global multinationals are really keeping an eye on inflation in China," said Kevin Potts, an executive with Emptoris, a company that helps businesses manage their supply chains.

With that close eye and China pushing local purchasing, look for some interesting G20 debates and labor choices in the U.S. in the future.

Photo Credit: Ivan Walsh