Many nations trading with China should be pleased-this country's currency, the renminbi (RMB), is rising, and this could help ease their own deficits.

But the RMB appreciation within China itself is a complex affair, with some benefiting domestically and others downright devastated.

On February 3, when the RMB-dollar exchange broke 7.76:1, industry insiders began wondering whether this rate could go even lower to truly alleviate China's trade surplus in 2007. Since the currency exchange rate reform in 2005, the RMB has appreciated 5.75 percent.

Domestically, on a macroeconomic level, China's economy is humming along with the trade surplus.

Cheng Xiaozhou, an economist with Greenway International Business Consulting, stated that during this RMB appreciation phase, the Chinese economy has shown signs of robust development. In 2006, China's GDP grew by 10.5 percent, with the total import and export volume reaching $1.76 trillion-a year-on-year growth of 23.8 percent. The Chinese trade surplus in 2006 hit a record high of $177 billion, rising 74 percent compared with the previous year. Also last year, the in-place foreign capital was $63 billion and foreign exchange reserves surpassed $1 trillion. Cheng believes the vigorous economic performance will be able to sustain a 5-percent appreciation rate for the RMB.

But under such circumstances, if the RMB continues to appreciate this year, what will be the affect at the more micro-level-on mom-and-pop exporters for instance?

Not a big deal?

Xie Guozhong, the former Morgan Stanley chief economist of the Asia-Pacific Region, noted that there are many factors contributing to the import and export volume, and currency fluctuation is not the only factor influencing foreign trade.

Xie pointed out that the exchange rate will directly influence the price of import and export commodities and services, which further affects the import and export volume. However, there are many other reasons for trade, like the economic perspective of trading partners, market supply and demand, tax rebates and quota changes. Apart from those, the flexibility of supply and demand, the cost to enter and retreat from a market and other factors also influence international trade.

Hu Zuliu, Managing Director of Goldman Sachs (Asia) L.L.C., argued that the cheap labor cost will further shore up support for exports.

"In the past decade or two, the average salary of Chinese workers increased year by year, but their salary level is still far behind that of developed countries," said Hu. For instance, whatever way you look at it-by hour, day, week, or month-salaries in the Chinese manufacturing industry is only one 20th of that of America, and one 10th of that of South Korea.

Hu further contended that it doesn't matter whether the RMB appreciates 2, 5 or even 15 percent, as it will have little impact on exports. He said that is because of China's labor cost advantages.

Many import and export enterprises also agreed that the small RMB appreciation will not do much harm to imports and exports. However, those engaged in large-scale complete facility imports and exports will suffer. It is because it usually takes five to 10 years from the signing of an agreement and delivery until payment. It is hard for the dealers to estimate the long-term currency exchange rate, and they will have to shoulder many risks.

Guangdong Silk Import & Export Corp. (Group) (Guangdong Silk Corp.) mainly deals with textile and clothes imports and exports. Its Board Chairman, Zhang Qingzeng, said in order to avoid the possible risks brought about by RMB appreciation, the company has been cautious in accepting overseas orders. They would rather choose short-term delivery within two or three months and avoid long-term orders. If the clients insist on signing long-term order sheets, the company requests setting product price phase by phase to cut the risks.

Textiles hit hardest

"We can barely survive," sighed Zhang, adding, "the clothing industry is probably the least profitable. RMB appreciation will devastate us, especially the workers."

Zhang said his is not the only company that has suffered. "The 5-percent RMB appreciation has been a major blow to big companies, let alone the small and medium-sized textile processing enterprises." Zhang added that in the southern coastal regions, those small and medium-sized enterprises have actually become pillars for local economic growth.

Meanwhile, international trade partners have shown their increasing competitiveness. Zhang said Chinese textile companies have been fighting hard against neighboring countries. Many American order sheets are flowing into India and Pakistan, as the clients would prefer to choose manufacturers that guarantee the lowest cost. What's more, most of China's surrounding countries do not have quota restrictions.

Qian Jingfang, associate trade professor with Donghua University, pointed out, "The textile companies like Guangdong Silk Corp. have become one of the major forces to create employment opportunities." Qian noted in Zhengjiang and Jiangsu provinces, the textile industry has been strongly supported by local governments, which tend to see those companies as an important channel for extra labor placement. The RMB appreciation will hit local employment hard, Qian said.

In 2006, China's total textile exports exceeded $120 billion, up 15 percent year on year. However, Professor Qian pointed out that even though the export volume has been growing, profitability isn't increasing accordingly. China has provided the United States with many good-quality and low-cost products, but is still being unfairly questioned and sanctioned, Qian said.

Although RMB appreciation is painful for the textile industry for the time being, Qian also hoped the RMB exchange rate reform would help adjust export orders of the textile industry so that only the competitive could survive.

Mei Xinyu, a research fellow with the Ministry of Commerce, believes that pressured by the RMB appreciation, exporting enterprises will be forced to adjust themselves. For instance, the industry can be moved to western regions where cost is lower and could make up for the RMB appreciation.

Wu Zhenchang, Board Chairman of Guangdong Chuangxin Shoes Corp., said that they are discussing with their clients and suppliers a move to less developed regions.  

Gains and Pains From RMB Appreciation The appreciation of China's RMB means one dollar can be exchanged for fewer yuan. Therefore, as for domestic exporters, the one dollar export will take in less yuan. As a result, the profitability of exporters will be affected. From the perspective of domestic importers, they will be glad to pay less for the same import goods, which means the import cost will be reduced and profitability increased. Due to the differences in industries and cost structures, the influence of RMB appreciation on Chinese importers and exporters differs. Export Industries Textiles: The RMB appreciation is hitting Chinese textile exports the hardest. Textiles have always comprised the biggest exporting industry for China, and 50 percent of Chinese textile products rely heavily on exports. However, the largest proportion of textile exports are based on low labor costs and a pricing edge, and the profit is low. According to a webtextile.com estimation, every 1 percent appreciation of the RMB will cause a 2-6 percent drop in textile commodity profit. From January to October 2006, the overall profitability of textiles was 3.9 percent. If the RMB appreciates 5 percent, the profitability may drop by 10 percent at least. Home Electrical Appliances: The home appliance export industry will suffer heavily. China has become a major production base for international home appliance giants thanks to its low manufacturing costs. Overseas orders are a major source of sales revenue. The RMB appreciation has posed a considerable negative impact on home appliance manufacturers and will further lower their profitability levels. Import Industries Paper making, iron and steel, petrochemical, aviation and auto industries: The RMB appreciation has reduced import cost, and many raw materials in these industries are imported. This will cause a positive impact on the abovementioned industries. The aviation industry can benefit much, for instance, because on the one hand, fuels are mostly imported, and on the other, indebted aviation companies pay back their creditors in dollars. The RMB appreciation could thus bring more revenue to the aviation industry. Raw materials processing industry: The slight RMB appreciation won't affect the import of raw materials like coke, textile materials and non-ferrous metals, as their prices are already among the cheapest in the world.