Impact on Chinese companies: For most, not much
(International Herald Tribune)
Updated: 2005-07-25 15:11

China's revaluation of its currency by 2 percent against the United States dollar, announced here Thursday night, represents a sliver of the sharp rise that politicians in Washington demanded to stanch China's ballooning trade surplus. 

But even this slight adjustment may slow Chinese exports and damp the country's economic growth, China's central bank suggested in one of many opinions Thursday on the effect of the stronger yuan.

"In the short term, reform of the exchange rate mechanism will have some impact on economic growth and employment," a spokesman for the People's Bank of China told the official Xinhua News Agency.

China's longstanding exchange rate of 8.27 yuan to the dollar contributed to China's growing trade surplus, but also worsened trade frictions, he said. "Moving forward with reform of the renminbi exchange rate mechanism will ease external trade imbalances," the spokesman said; the currency is also known as the renminbi.

China's trade surplus reached $40 billion in the first six months of the year as exports grew 33 percent over the period last year, according to Chinese customs data.

Across a range of industries, the assessments of how the slightly looser exchange rate would affect business ranged from nonchalant to dire. In general, larger businesses with strong capital bases are expected to cope easily with the change; manufacturers squeezed by intense competition and low profits may feel its impact, economists and investors said.

"It won't have a big effect, because 2 percent is a very limited rise," said Zhang Shuguang, an economist at the Chinese Academy of Social Sciences in Beijing who has studied the possible impact of revaluation. "There will be some impact, but it will be on those labor-intensive processing businesses with low profit margins, not the whole sector."

Steel has been among China's fastest-growing exports, soaring 208 percent in the first five months of this year compared with the period last year. But the currency move will have little impact on those exports, said Xu Zhongbo, the chief executive of Beijing Metal Consulting, which advises some of China's major steel makers.

"I think a change of only 2 percent will make no real difference to the steel industry," he said. "The government is only showing to the outside world that China can be flexible."

But Ruan Xiaoming, who makes sewing machines in eastern China and whose Gemsy Holding Group has been held up by the government as a model small exporter, bemoaned the revaluation as a blow to his business.

"This is going to hurt us badly; the losses will be big," he said.

"It's simple: our profits will go down 2 percent, and that's a big fall for a business like ours."

But executives in other export industries that have been threatened by quotas and antidumping tariffs by the United States and Europe saw little lasting pain in the revaluation.

"It won't affect us much," said Liu Peisheng, the deputy manager of Nanheng Furniture Production, an exporter in Lecong, in far southern China. "The whole industry here will be affected the same way as us, and Chinese goods will still be cheaper than other places."

He said that the revaluation was unlikely to induce customers to move orders to other countries. "China's price advantage is too large to them for that to happen," he said.

Textile and garment manufacturers also said that the revaluation might hurt exporters, especially smaller ones, but larger, more established exporters would be able to absorb lost earnings.

The Fountain Set Group, a fabric maker that has headquarters in Hong Kong and is China's second-biggest textile exporter, was named in a study  by Morgan Stanleyas one of the China-based companies most vulnerable to revaluation. The study suggested that Fountain Set would lose 4 percent of profit for every rise of 1 percent in the yuan exchange rate against the dollar.

But Gordon Yen, Fountain Set's executive director, said the company would lose little in long-term competitiveness from revaluation, because its chief competitors would be similarly affected.

"It will affect costs in dollar terms," he said in remarks made before the revaluation, "but the important thing is that these changes apply to everyone producing in China."

Sue Kearney, who analyzes the textile and garment sector for the business consultant A. T. Kearney in Chicago, estimated that the yuan would have to rise 18 percent against the dollar - a jump far higher than China has ever hinted at contemplating - to erase China's current competitive advantage over rival exporters in making blue jeans.

Yu Jie, an economic commentator and manager at China Guangsha, a private real estate and investment conglomerate, said, "Some businesses may die, but not the larger ones. This is just a small, exploratory step that most businesses can cope with." If China's exporters were badly hurt by the revaluation, the government might step in with tax rebates and other measures to restore profits and competitiveness, he added.

"The government will also use this as a pawn in trade talks with the U.S. and Europe to gain trade concessions for China," he said, "so there may be some other gains from it."

(courtesy of the International Herald Tribune)

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