China's textile industry will start to lose money if the yuan
continues to appreciate, the country's top economic planner warned
"With their average profit margin currently at three percent,
textile companies will no longer be able to absorb the cost of the
rising yuan," said the report by the National Development and
Reform Commission (NDRC).
The dire prediction came as the Chinese currency yesterday hit a
new high against the US dollar since it was revalued a year
The People's Bank of China set the reference rate for the
renminbi against the greenback at 7.9499 yesterday. It closed at
7.9385 at 5:30 PM in Shanghai.
It was a record high after China allowed its currency to
appreciate by two percent in July last year to 8.11 against the US
dollar and linked it to a basket of currencies instead of the
The reference rate is an indicative mid-point for the yuan exchange rate, from which the currency can move
within a 0.3 percent floating band, either up or down, each
The currency has been strengthening gradually over the past 13
months and has risen by a further two percent since the
The market forecast is that the yuan would appreciate by another
three percent against the US dollar, to 7.72, over the next 12
Top Goldman Sachs economist Sun-Bae Kim has made an even bolder
prediction, saying that the yuan would rise by six percent in 12
"If the appreciation continues, the profit margin (of textile
exporters) will be eaten up within a year," the NDRC report
Chinese textile manufacturers have been marking down their
prices this year to sustain exports and offset the negative impact
of the rising yuan, said the report.
Citing research by Guotai Jun'an Securities Research Institute,
the commission stressed that a 1-percent appreciation in the yuan
would lead to a loss of two percent in profit margins. In sectors
heavily dependent on exports such as cotton, wool and fabric for
home use, the decline could be as much as six percent, it said.
As exporters earn only an average of 30 US cents from the export
of a shirt, the appreciation of the yuan underlines the need for
textile manufacturers to sustain their competitiveness through
technical innovation and intellectual property rights protection
rather than through price cuts, said Li Lingmin, vice-president of
the China National Textiles Imports and Exports Corporation.
The growth rate of China's textile exports has slowed but they
still rank the highest in the world.
From January to July, exports reached about US$27 billion, up
18.7 percent from the previous year. The growth rate is 4.3
percentage points lower than last year, and 3.1 percentage points
lower than in January.
Economists said the trend of yuan appreciation is likely to be
maintained, given the strong growth of the Chinese economy, rapid
increase of foreign exchange reserves and trade surplus, and in
particular, a strong expectation of further appreciation.
But Wang Xiaoguang, a senior researcher at the Academy of
Macro-economic Research affiliated to the National Development and
Reform Commission, said further appreciation should be avoided
because it will not help to right the unbalanced structure of the
economy or curb overheated investment.
A slow appreciation also does not work because it would
strengthen the expectation of further appreciation of the currency
and nurture speculation by domestic or international investors,
Wang wrote in an article published in Shanghai Securities
He suggested China make it clear that maintaining a stable yuan
exchange rate in the medium and long term is a premise for stable
economic growth in the long run.
The authorities should promise to increase the flexibility of
the foreign exchange rate regime and stress that the yuan will not
move in only one direction, he said.
(China Daily, Xinhua News Agency September 5, 2006)