US Fed cuts raises pressure on RMB appreciation

30 Jan '08

2 min read

Fed cut by 75 basis points of interest on January 22, due to worsened economic outlook of the US, has been one of the biggest rates cut since 1980 by the Federal Reserve. Most economists expect further Fed cuts, with analysts opining that the Federal Reserve meeting in next week will cut another 50 basis points.

Experts believe that Fed rate cut substantially increases the pressure of RMB appreciation. It will further lower the cost of cotton imports, providing bearish factors to domestic cotton market, in addition, from a long run viewpoint; it will also make China's textile exports face greater pressure.

Connoisseurs say that China's textile and garment industries have as high as 50 percent dependence on exports. Therefore, RMB appreciation has an obvious impact on textile and garment enterprises. Higher RMB exchange rate will break through the enduring limitation of domestic textile and apparel Enterprises.

It is estimated that each 1 percent appreciation of RMB will lead to 2-6 percent decline in sales profit margins of textile and garment industries. It will have higher influence on apparel industry that has higher dependence on exports.

On the other hand, import proportion of cotton and chemical fiber, which are main raw materials for China's textile and garment enterprises, is as high as 20 percent, major textile equipment imports account for 60 percent and raw materials and equipment depreciation account for over 85 percent of totalcosts.

RMB appreciation will greatly reduce import costs of textiles and garment enterprises. It will be positive to China's textile and garment exports, which may be seriously restricted by US subprime mortgage loan crisis, but bearish to domestic cotton market.

The industry believes that US loan crisis will add to all the external pressures, significantly speeding the slow-down of China's textile and apparel industry.

Fibre2fashion, News Desk - China

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