Chinese Currency Likely Won't Strengthen

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Recent comments by Cheng Siwei, vice-chairman of the standing committee of the National People’s Congress, in China suggest that for the time being the gradual managed appreciation of the Renminbi against a basket of currencies has come to an end. As domestic growth slows and exports in certain sectors have been hit by the global slowdown, the authorities are introducing a number of measures to help exporters. Halting the currency’s appreciation is one of them. Since this time last year, the Chinese Renminbi has increased in value by 10% from 7.6 RMB/$ to 6.8 last month, but as the US dollar has rallied over the last month against all currencies, it has also risen against the RMB such that it now stands slightly above the lows at about 6.85.

In the short term this will not have any affect one way or the other but in the longer term coupled with other export orientated measures the Chinese are taking will help support the continued competitiveness (survival the Chinese may say) of many lower value export activities. Chinese electronics exports increased 24.1% in the first five months of this year, but that growth rate was down slightly on last year and will fall in the second half of this as global demand falls. But the authority’s real focus is on industries with high labor content. China is the world’s factory exporting 37% of its output overseas; compare that to the USA at 8% and India at 13%. When a country imports a large part of the components that it then exports it is less exposed to currency fluctuations in the sense that lower export values are balanced by lower import costs. It has been estimated that the domestic value-add in a $150 iPod made in China is just $4. So the authority’s real focus is on industries like textiles, shoes and toys that have been closing in record numbers over the last year. A halt in the appreciation of the Renminbi and a continued strengthening of the US dollar will result in greater competition from Chinese manufacturers in the US market. A welcome development for US importers relying on Chinese low cost components but not so welcome for US manufacturers who have enjoyed a reduction in competition in the first half of this year.

–Stuart Burns

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