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Yuan appreciation impacts textiles

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Zhang Hongzhong, vice general manager of Beijing Topnew Import & Export Co., Ltd., has been keeping a close watch on the yuan's international exchange rates. Zhang's company trades mainly in knitted and woven products.

Although the yuan has only fluctuated slightly against the US dollar in the last few months, analysts, more so foreign analysts, have warned that the yuan might quicken its pace of appreciation soon.

On May 15, the yuan traded at an all-time high of 7.9982 against one US dollar. But it was unable to maintain that high and by Friday, May 26, it was trading at 8.0216 yuan to the dollar.

"Generally speaking, the impact of this particular exchange rate movement was not big," Zhang said. "Given that garment manufacturing requires a turnaround time of two to three months, a one to two percent fluctuation in profit margin is already factored in from the beginning."

However, major losses can be attributed to the revaluation exercise last July, the largest reform of China's foreign exchange system in 10 years.

"We had signed and delivered on orders, but by the time we wanted to do the foreign exchange transactions at the bank, the exchange rates had suddenly changed," Zhang said.

On July 21, 2005, the People's Bank of China (PBC), the country's central bank, announced that it was scrapping the yuans' decade-long peg to the US dollar. A basket of currencies and a managed floating system, offering a wider trading band, was to be used instead.

The move sent the yuan appreciating by 2 percent in a flash, adversely affecting thousands of Chinese companies. Zhang's company, for example, lost between 2-3 million yuan (US$249,264 to 373,919) as a result of the revaluation, and subsequent orders were also affected.

The revaluation of the yuan and the likelihood that it will continue to appreciate in time to come has raised concerns for the continued competitiveness of China's textile industry, which has, until now, been riding on its one market advantage; low prices.

When Topnew started its export business several years ago, it traded mainly in manufactured trousers, jackets and work clothes. It earned an average of about six to seven yuan (75 to 87 cents) per garment.

"We produced low-end products. But now, from the point of view of a development strategy, we aim to produce products with higher added-value, raising profits to 10 dollars per garment," Zhang said.

From manufacturing low-end, low-priced clothes, Topnew switched to producing outdoor leisure gear.

The company now manufactures for Columbia, the largest sportswear brand in the US. It also has orders from Swedish fashion retailer, H&M.

Modifying business strategies is essential for textile manufacturers, particularly those with an international trade business. The appreciation of the yuan will have a long-term effect on such companies, according to Zhu Yuhe, secretary of the board of directors of Zhejiang-based Zhongda Group, in a China Business News interview on May 16.

The textiles sector, with average gross profits of five to 10 percent will cease to be as lucrative once the yuan appreciates by 5 percent, he said.

Moreover, since the majority of Chinese products are low-end and easily replaced, it would be difficult to expect foreign customers to absorb any extra costs.

In fact, many foreign customers have already placed orders with China's Southeast Asian neighbors such as Vietnam and Myanmar.

Sun Huaibin, spokesman for the China National Textile Industry Council (CNTIC), said that many Chinese companies could find themselves in the red as a result.

Textiles account for a high proportion of China's export volume and value. In 2005, the sector reported a trade surplus of US$100.4 billion and 24 percent of China's international trade.

If the yuan appreciates by 1 percent, the growth rate of textile exports will decrease by 1.5 percent, Sun said, quoting research estimates.

But, this isn't necessarily a bad thing because it would force a shift towards increasing the added-value of products.

"Enterprises should gradually change their business models from the high-quantity, low-price model to high-value, brand-creation model. This would help ensure that they get comparatively high returns while fending off risks like currency fluctuations," Sun said.

The current situation is that Chinese firms only manage the manufacturing process, while their foreign customers manage branding and sales functions. This is why China enjoys only a small share of the international trade value chain, Sun said, adding that this must change.


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