Appreciating Yuan adds to woes of T&G sector

December 29, 2008 - China

Since the day, China has introduced the managed floating exchange rate system based on market supply and demand with reference to a basket of currencies from July 21, 2005; so far the Renminbi has cumulatively appreciated 16 percent against the US dollar. At present, the dollar is still traded for all settlement of China's foreign trade. With the rapid appreciation of the Yuan, many industries are expected to be affected by the appreciation to different extents.

The cotton textile industry:
The cost of raw materials accounts for 65 percent of all expenses in the cotton textile industry while average gross margins are around 10 percent, based on industry-related statistical indicators. The cotton textile industry mainly produces cotton yarn and grey fabrics. A higher proportion of its raw materials are related to international prices and value added to its products is low.

Hence the bargaining power of cotton industry is weak and has to absorb 90 percent of the RMB revaluation pressure, due to which realizations from exports are lower than for other industries. Dependency on exports of the cotton textile industry is nearly 20 percent, so every one percent of RMB appreciation means, 3.19 percent decline in profit margins of the cotton textile industry as a whole.

The wool textile industry:
In this industry, cost of raw materials accounts for 60 percent and the average gross margin are around 12 percent, based on industry-related statistical indicators. Although the wool industry mainly relies on imported raw materials, its product bargaining power is stronger than cotton textile but weaker than apparel industry, due to its longer industrial chain and higher value addition, so its losses from exports are relatively less.

Export dependence of wool textile industry is 27 percent, so, every one percent of RMB appreciation means 2.27 percent drop in profit margins of the industry as a whole, which is lower than that of the cotton textiles and garment industry and across the whole sector.

The garment industry:
The cost of raw materials accounts for 55 percent of all costs in the garment industry with the industry margins averaging 14 percent, based on industry-related statistical indicators. The garment sector has a higher bargaining power as it is more labour intensive and carries a comparative advantage vis-à-vis the cotton and wool industry and due to which garment manufacturers are able to competitively price their products in global markets.

Exports from the garment sector are the highest across the whole sector and accounts for 60 percent of all clothing manufactured in the country, so variation or appreciation in the Yuan affects the highest. A one percent revaluation of the RMB means 6.18 percent decline in profit margins of the apparel industry, which is the main reason for the slow growth rate in exports of clothing to the US in 2008.