By Xing Zhiming (China Daily)
Updated: 2008-03-10 10:23

The Chinese Year of the Rat is believed to bring luck and fortune, but for many Chinese enterprises, especially exporters in the coastal regions, it has brought along uncertainty.

Many exporters may be facing closure as their operational costs rise while competition intensifies. "The yuan's appreciation, along with rising labor and materials costs, is squeezing us dry," says Wang Fu, general manager of Shenzhen Jiayinking Electronics, a 200-staff exporter of hi-fi systems to Europe, Japan and Africa.

In the Pearl River Delta, tens of thousands of export-oriented manufacturers may have to close their businesses or move them to places with lower operational costs, such as Vietnam.

The woes of these enterprises reflect the general problems in the wider economy, which is facing challenges on several fronts this year: yuan appreciation, uncertain foreign demand, rising inflation risks and unflagging oil prices.

Policymakers are standing at the crossroads: should they continue tightening policies or loosen up a bit in the face of a US-led global economic slowdown? Either way, China's economic growth is set to ease this year - although opinions differ to what extent.

Major international institutions, such as the International Monetary Fund (IMF) and the World Bank, have scaled down their forecast of the country's GDP growth this year to around 10 percent or lower from last year's 11.4 percent. Analysts said the consumer price index is expected to increase faster than last year and exceed the 4.8 percent target set by the government this year. Some even warn that China is in an upward inflation cycle, with high inflation likely to continue for some years.

Yuan threat

The yuan appreciation may accelerate this year, many economists have warned, forecasting that it will rise to about 6.6 to 6.8 against the dollar. In the one-year non-deliverable forwards market, the exchange rate of yuan is around 6.47, indicating a much stronger revaluation expectation.

The pace of yuan appreciation in the first two months of this year has surprised many. Its central parity rate is hovering around 7.1 against the dollar, rising more than 2 percent so far this year. If the momentum continues, it will appreciate much faster this year.

"Although the yuan appreciated by nearly 7 percent against the dollar last year, it has in reality depreciated against the euro, which means the revaluation pace could pick up this year," says Wei Weixian, an economist with the University of International Business and Economics.

Many economists warn that too fast an appreciation would hurt the economy, making things way more difficult for exporters. Yang Fan, senior economist with the China University of Science and Law, warns that in the longer term, if the yuan crosses 6 to the dollar, it will deal a "dangerous" blow to the Chinese economy.

"A sharp increase in yuan's value will have a great impact on foreign trade," says Lian Ping, chief economist of the Bank of Communications. "It will endanger many export-oriented sectors, so it'll be best for the yuan to appreciate gradually."

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