Revaluation to be driving force
(China Daily)
Updated: 2005-08-09 08:34

The revaluation of the yuan, or renminbi, is expected to become a driving force in restructuring the country's textile industry while affecting textile exports.

"The currency reform of China is not simply bad news to the textile sector," said Mei Xinyu, a trade expert with the Chinese Academy of International Trade and Economic Co-operation, a thinktank of China's commerce ministry.

He said the appreciation of renminbi would certainly affect the textile manufacturers, particularly those which rely on a low-price policy.

Taking advantage of the low material and labour costs, many of Chinese textile exporters were satisfied with earning a slim profit from OEM (original equipment manufacturing) for large international brands.

Such bad practices always led to fierce competition in the market and trade conflicts with foreign trade partners.

"The revaluation of renminbi will push enterprises to adjust their trading method and increase the low export prices," Mei said.

His view is echoed by Li Mingxing, director of the international department of China Enterprise Confederation, saying that under an unchanged exchange-rate, the exports would have no impetus to improve their export structure.

In fact, some textile producers are planning to adjust their strategy in calculating their losses from the appreciation. The easiest way is to increase the prices.

"We hope to increase the export prices by 2 per cent in order to cope with the appreciation," said an official with a medium-sized garment exporter, who declined to identify herself and her company. She said the company will negotiate with customers for new orders using this increased export price figure.

"We will probably have to share the cost hike with them," she said.

Some enterprises claimed that they will shift parts of their business to the domestic market so as to avoid losses from the international market.

Mei said although most enterprises would be able to absorb the impact of the currency reform, they should readjust the industrial structure instead of simply relying on the cheap labour costs.

China's textile sector is predicted to become one of the most severely affected industries in the country since the central bank announced late last month to move to a managed floating rate regime based on market supply and demand and with reference to a basket of currencies.

According to estimates of China National Textile and Apparel Council, the country's textile industry will lose about US$2.5 billion for the 2 per cent appreciation of renminbi.

Meanwhile, experts predicted that the reform would also influence the foreign direct investment (FDI) to China's textile sector.

As the appreciation increased the costs for the textile industry, some foreign investors might consider shifting their capital to some Southeast Asian countries to cash in on the inexpensive costs, Mei said.

"However, such a move will help China to upgrade its utilization of foreign investment," he said.

He explained that those investors who profited in employing low-paid Chinese workers would make the shift first.

The reform will, at the same time, encourage most foreign companies to improve their added-value and technologies while injecting money into China's textile industry.

Experts believe, however, that most companies will not withdraw from China as the country enjoys one of the most comprehensive industrial chains in this sector, from human resources and materials to equipment.

"It might take a manufacturer only half a day to find certain equipment in China, but over three months in some other countries," he said.