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Published: February 3, 2010

 
 

The Supply Chain Is Flat

S+B: Is China’s low renminbi–dollar exchange rate affecting its competitiveness?
FUNG: Everyone thinks China is such a juggernaut, but it has a serious weakness, one that reminds me of Japan in the 1970s and ’80s: a lot of production capacity, but no raw materials. China has some cotton but is still importing a lot from Pakistan and the United States. It has almost no wood. All the metals are imported. The only energy source China has in abundance is coal, which is highly polluting. China is very vulnerable, because it is subject to worldwide fluctuations in the prices of raw materials.

When the RMB [renminbi] appreciated [in 2005–07], China fell into a fairly uncompetitive situation. Now, China believes that it can be competitive if its industrial base, especially for exported goods, moves away from the high-cost coastal regions and into the interior. Until that happens, China is unlikely to let the renminbi appreciate, because doing so would put the country in a position of being vulnerable to changes in materials prices.

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  • Sheridan Prasso is a contributing editor at Fortune magazine and an adjunct professor of international affairs at Columbia University.
 
 
 
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