The central bank has set the yuan central parity rate at record 7.758 yuan to the dollar. To solve the potential problems bought by trade surplus, it is likely for China to accelerate yuan appreciation. A report released by the international trade and economic cooperation research institute under the Ministry of Commerce estimated that it is likely for yuan to be appreciated by 9 to 10% by the end of 2007. How would this affect China’s industries and import-export structure?
According to a report of Shenyan Wanguo Securities, continuous yuan appreciate would usher in vibrant changes to China’s industrial structures. At present stage, the most competitive industries include machinery, sewing equipments, harbor machinery, PC and CRT displays. With capital- and technology-based industries gradually replace labor-based industries, industries such as shipbuilding, semiconductor, IC design, TFT display, engine bed and drilling equipment would become more competitive. Shenyan Wanguo estimated that China’s growth rate in imports is likely to retain at 20% or above, exceeding growth rate in exports in 2007. At the same time, yuan appreciation would reduce the export competitiveness with higher cost and prices. Considering China's labor cost is still comparatively lower than many other countries', exports remain optimistic. The annual growth in export would fall around 6.5% year-on-year to around 20%.
Home appliance industry
Xiamen Overseas Chinese Electronic Co., Ltd said that if its export volume can retain on the same level as that of first half of 2006 at US$100 million in 2007, yuan appreciation would practically make the firm lose 49 million yuan (US$6.36 million) the coming half year. Overseas patent fees would also generate more financial pressure on the home appliance exporter.Skyworth Group said that yuan appreciation can accelerate the process of Chinese home appliance firms investing overseas to establish manufacturing entities, with the aim to directly reduce the cost of overseas investment. This can not only relieve the pressure from yuan appreciation but also minimize potential trade conflicts.
Skyworth Groups said that Yuan appreciation might accelerate the process of Chinese home appliance companies investing overseas to establish manufacturing entities, aiming to directly reduce the cost of overseas investment. This would not only relieve the pressure on the home appliance industry from Yuan appreciation; it would also minimize potential trade conflicts.
Textiles
According to Web Textiles.com, the textiles and garmet industry would suffer between a 2% and 6% drop in profitability when the Yuan is appreciated by 1%. Thus Yuan appreciation would have a deep impact on those textile and garment firms that rely on exports. The current export tax reimbursement system would also be challenged.Silk firm Zhejiang Cathaya International Co., Ltd commented that while Yuan appreciation would indeed trim profitability, it is engaged in talks with foreign-funded banks about the possibility of engaging in financial commodities, including forward transactions to minimize forex risks.
Civil Aviation
General manager of China Southern Airlines, Liu Shaoyong, said that 2006 was the company's first profitable fiscal year since its establishment five years ago. Yuan appreciation and falling fuel prices, along with a more positive civil aviation sector, have contributed to its improved financial performance.According to Guotai Junan Securities’ report, Chinese airlines are generally burdened with a large amount of debt in US dollars. They also face problems arising from foreign currency when they conduct large-scale merchandising of fuel, aircrafts and important parts, as well as aircraft maintenance and repair. Thus, the rise of the Yuan central parity rate contributes in direct and constructive ways to airlines' operations.
When yuan was appreciated by 2% in 2005, the remittance income of Air China, China Southern Airlines, Chain Eastern Airlines and Shanghai Airlines were 1.054 billion yuan (US$136.88), 1.232 billion yuan (US$160 million), 588 million yuan (US$75.38 million) and 93 million yuan (US$11.95 million) respectively. The cost of repair and maintenance also saw notable reductions that year.
Other industries conducting import business also benefit from a rise in the Yuan central parity rate. Nine Dragon Paper Industries Co Ltd saw not only rising stock market prices but also a reduction in cost, since its raw material, pulp, is purchased in US dollars.
According to Huaxia Fund Management’s report on 2007 investment strategy, yuan appreciation would be one of the highlights in stock market investment this year. Industries that do not center on trading goods, such as real estate, tourism, lodging and financial services, would become increasingly profitable, whereas industries centered on trading goods, including electronics and drug makers, would encounter extra difficulties in attracting overseas investors.
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