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Export-oriented enterprises in clutches of appreciation
Jul '08
RMB appreciation has accelerated at an uncontrollable pace since 2008. Statistics released by China Foreign Exchange Trading Center shows that the mid-price of RMB against the US dollar was 1:6.861, representing an accumulated appreciation of more than 6 percent from the end of last year.

This means that the level of appreciation in the first 6 months was equivalent to that of the whole of 2007. It is believed that initiation of RMB reform mechanism on July 21, 2005 has led to this trend of appreciation in the yuan-dollar exchange rates.

RMB appreciation against US dollar which was 3.3 percent in 2006 has gone up significantly after entering 2008. Starting from this year, the exchange rate broke through the marks of 7.2 and 7.1 in less than 100 days. All of this has had a negative impact on the export making enterprises whose profit margins have seriously deteriorated.

To worsen the situation, the central bank announced on June 7 that the RMB deposit reserve ratio will be increased by one percentage point. This tightening of monetary policy has become a cause of worry for enterprises, especially in the textile industry who are already in a disastrous state.

This decision will starve the industry of funds as a portion of resources with the banks will be sucked up due to the order.

Moreover, the State Development and Reform Commission has issued a notice, deciding to increase the prices of petrol and diesel by 1,000 yuan per ton. As a consequence, transportation costs have expanded even further which would in turn put pressure on prices of raw materials and finished products.

However, a study done on the textile enterprises reveal that they are unwilling to bear the price rise. Besides, most of the units are undergoing maintenance while a number of others in Guangdong and Fujian province have closed down.

On the other hand, the industrial producer price (PPI) also rose by 8.2 percent in May creating new records in recent years. Even in chemical category, prices of almost all the products have increased except for polyester filament which declined by 4.6 percent.

Clothing category also marked a year on year drop of 1.5 percent as prices fell by 1.6 percent. All of the above adversities explain clearly that the textile industry of China is reeling under global economic turmoil caused by sub prime credit crisis in US. This in turn is throwing SMEs on the edge of bankruptcy.

Fibre2fashion News Desk - China

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