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China's exporters feel pain of rising yuan

Publication Date : 16-01-2014

 

Ong Khim Kiat, a Singaporean businessman who engages Chinese factories to build hand tools like hammers and pliers for his manufacturing firm, has seen the rising Chinese yuan crimp the profits of his business.

While these factories in areas like Jiangsu and Zhejiang have not raised their prices, the yuan's value - at its highest in 20 years - means that his costs are higher in Singapore dollars.

This has dragged down profits of Sellery Tools by 2 per cent to 3 per cent, which Ong says is "still acceptable" - for now.

The yuan has been buoyed by a recovery in exports on the back of resurgent demand from the West, even as Beijing relaxes its grip on the yuan's exchange rate as part of a slew of reforms.

Chinese consumers might be cheering the strong yuan which has made their vacations cheaper and allowed them to buy apartments in London and New York. But exporters are feeling the pain as other Asian markets with weaker currencies and cheaper labour price them out.

The yuan, also known as the renminbi (RMB), rose 2.9 per cent against the US dollar (USD) last year to 6.05, earning it the title of Asia's best performing currency.

It is expected to climb 2 per cent to 3 per cent this year, dipping below the six yuan per USD level.

Its rise marks a reversal of China's policy since 2008 in undervaluing its currency by pegging it to the USD. But the yuan was allowed to move in relation to a basket of currencies in 2010, appreciating 18.5 per cent against the USD between June 2010 and November 2013 after taking into account inflation, analysts said.

"This appreciation signals China's move towards a market- based exchange rate in line with plans to internationalise the yuan," University of International Business and Economics professor Chen Shengjun said.

Experts say that Beijing has also allowed the yuan to climb as it switches to a growth model driven by domestic demand. A strong yuan can encourage the Chinese to spend more as imports get cheaper.

DBS Bank economist Nathan Chow said the yuan's rise is a long-term policy tool to rebalance China's economy rather than short-term cyclical dynamics.

"The RMB gain can effectively crowd out inefficient firms," he noted.

"By reducing and reallocating excess resources in the export sector, RMB appreciation aids the development of a service-oriented industry, enhancing China's overall competitiveness."

Andrew Polk, an economist at research firm Conference Board, said the yuan has been allowed to rise partly to make China continually attractive to capital flows from abroad.

"A rising yuan will partly offset outflow pressure induced by the tapering of the quantitative easing programme in the US," he said.

But while it is a challenge to China's exports, a strong yuan has its upsides. It tames inflation, attracts foreign capital and provides opportunities for Chinese firms to expand globally.

Chinese investors poured money into 4,522 firms in 156 countries and regions in the first 11 months of 2013, the commerce ministry said. Non-financial direct investment hit US$80.24 billion, up 28 per cent from the previous year.

"Since a large portion of China's exports are assembled from imported parts, a rising yuan will make some inputs cheaper, mitigating the impact of a stronger exchange rate," added Polk.

But experts note that there will likely be short-term pain during the adjustment and Chinese leaders will have to walk a tightrope of overseeing this transition while maintaining growth, which has fallen to its weakest in 14 years.

Labour-intensive industries like textiles have borne the brunt of a stronger yuan due to their low profit margin and high reliance on exports. Rising wages expected to spike 10 per cent this year are adding to their misery.

Sportswear firms like Nike and Adidas have shifted their manufacturing bases to countries like Vietnam over the past few years due to rising costs.

But experts say the manufacturing and export sectors are more resilient to RMB appreciation now as they have moved up the value- added chain over the past decade, with small and medium-sized firms and industrial companies performing better than expected.

It is also why businesses like Sellery Tools are less affected by the strengthening yuan.

"We are not labour intensive and use high-tech processes, so our higher profit margins give us a buffer to cushion the gain," Ong said. "I'm more concerned with our products' quality rather than the exchange rate."

 

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