[eocavrWM]

Double wow...looks like China isn't going to play the inflation game (carry trade hot money in devalued dollars) by raising their currency. They are going to reduce their trade balance by actually raising salaries....

Some major game changing economic posturing going on.......

Feb. 10 (Bloomberg) -- China, under international pressure to reduce its trade surplus, may choose to shrink it through raising workers’ wages rather than letting the yuan appreciate, Credit Suisse Group AG said.

Higher labor costs would cut Chinese export competitiveness while boosting domestic spending power and sustaining economic growth, according to the bank. Premier Wen Jiabao’s government has been pressed by U.S. and European officials to end a 19- month yuan peg to the dollar to help diminish trade and investment imbalances that contributed to the credit crisis.

“Wage increases are a better option because they largely benefit Chinese workers,” Tao Dong, a Credit Suisse economist in Hong Kong who has covered the Chinese and Asian economies for more than 15 years, said in an interview yesterday. “Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico.”

The strategy may limit gains in the yuan to 3 percent this year, according to Tao. This month’s 13 percent increase in minimum wage in eastern China’s Jiangsu province indicates that higher pay will play an important role in officials’ efforts to rebalance growth in the fastest-growing major economy, Tao said.

In Jiangsu, which was the nation’s third-largest exporting province in 2008, the government raised the minimum wage to attract workers, the local labor department said. Shanghai, the No. 2 exporter, is following suit from April 1, Mayor Han Zheng said. Beijing, Zhejiang and cities in the southern Guangdong province also plan increases, the China Business News reported Jan. 27, citing labor officials.

Yuan Jump Unlikely

The wage decision “argues against a large one-off yuan revaluation,” Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, wrote in a note this week.

China has kept the yuan at about 6.83 per dollar since July 2008 to shield exporters from the global slump after a 21 percent gain in the previous three years. The foreign ministry last week rejected U.S. President Barack Obama’s call for the yuan to appreciate, saying the Chinese currency has little impact on American trade deficit.

U.S. and European pressure will only delay appreciation because Chinese officials won’t let themselves be seen as buckling, Tao said.

“Beijing will continue to resist pressure from the U.S. and other nations and look for ways that will benefit its own economy when it seeks to contribute to global rebalancing,” Tao said. “Higher wages will aid policy makers’ aim to boost domestic consumption and move away from depending on exports.”

‘No Delay’

President Hu Jintao on Feb. 3 urged “no delay” in efforts to reduce dependence on exports and investment and boost service industries and consumption. China’s current-account surplus fell 35 percent last year to $284.1 billion as exports declined because of the global slump.

The government will need to manage inflation expectations as wages climb, Tao said. Consumer prices jumped 1.9 percent on year in December and may have climbed 2.1 percent in January, according to the median estimate of economists in a Bloomberg News survey ahead of a government report scheduled for this week.

Improved global trade is boosting demand for labor in China, which overtook Germany last year as the world’s biggest exporter. China’s overseas shipments jumped a more-than-forecast 17.7 percent in December from a year earlier and imports surged to a record.

China May Choose Wages Over Yuan Gains to Narrow Trade Surplus - Bloomberg.com