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Face the rise of yuan

(China Daily)
Updated: 2006-09-06 09:06

Chinese textile exporters' wafer-thin profit margin could be further sliced off if the renminbi continues to rise as rapidly as it recently has.

However, to fix this problem, the revaluation of the yuan should not be slowed, but rather the reform of the textile sector should be quickened.

The Chinese currency rose to yet another high against the US dollar, closing at 7.9385 on Monday.

Ever since China allowed its currency to appreciate by 2 per cent last July to 8.11 against the greenback, the yuan has been strengthening gradually over the past 13 months, rising by a further 2 per cent.

Undoubtedly, such a slow but steady rise in the yuan will affect Chinese exporters, especially those with razor-thin profit margins.

A report the National Development and Reform Commission released on Monday noted that the average profit margin of the domestic textile industry stands at merely 3 per cent nowadays. It called for urgent efforts to boost industrial restructuring and upgrades, warning that, otherwise, textile companies will soon be unable to afford the rising yuan.

For Chinese textile exporters, it seems that a rising yuan will become the last straw that breaks the camel's back.

Or, it is an inevitable reality to which they must adapt.

Admittedly, unfair quotas the United States and European Union re-imposed on Chinese textile products after the removal of the global textile quota system at the beginning of 2005 have already done considerable harm to Chinese exporters.

Due to the extra cost of quotas, the growth rate of China's textile exports to the United States and European Union has been slashed by 76 percentage points and 46.2 percentage points respectively in the first six months of this year over the same period in 2005. Meanwhile, both the accelerated growth of China's textile exports to the rest of the world and other countries' soaring textile exports to the United States clearly confirmed the negative impact of those new quotas on China's textile industry.

Given the millions of jobs the textile industry provides at home, the government should certainly pay close attention to the troubles in which the sector is currently caught.

Nonetheless, a warning on the coming impact of a rising renminbi does not mean that domestic exporters can hope the central authorities to slow the pace of introducing more flexibility in foreign exchange reform.

In comparison with intense price wars among themselves, the competition of technological innovation and industrial upgrades will not be easy for Chinese textile manufacturers.

Since it will be at their own peril to drag on preparing for a more flexible yuan, textile exporters should better factor the reality into their businesses as early as possible.

The textile industry is just one of the domestic sectors that largely base their competitiveness on the country's comparative advantage of low labour cost. How it will weather the yuan's revaluation could be a salutary lesson for other labour-intensive manufacturing sectors.

And, obviously, turning a blind eye to the new reality should never be an option.