RMB and Textiles Industry

Besides the football worldcup, the hottest topic discussed in
the economic cycle of China in July may be the projection on RMB
appreciation. Pressure became sensitive when the government
announced that the GDP growth rate reached 10.9% in the first
half of this year, comparing with 10% in the same period of 2005.
On July 21st, 2005 the RMB/USD rate was increased by 2.5%.
Foreign exchange storage amount also augmented US$130 billion
compared with the same day in 2005, at then the RMB revalued.
An official of supervision department repeated the view that the
overheated investment picked up and caused the undue growth.
Some experts suggest that the government should promote the
importation and expand the change range of RMB/USD rate, or let
RMB appreciate again after one year later, and RMB should not
peg to the USD that has been going soft.
     The strongest opposite voice came from the textile industry
that has contributed important shares to the initial foreign
exchange accumulation. Presently in China, a worker in textile
industry earned the lowest salary of nearly US$10 per week. In
the past ten years, only fabrics prices kept going down. A
manager of a fabrics manufacturer told me that his company relies
on renting land to remain operation. If the RMB appreciates again,
the company will close down.
   I have read a financial report from Heilongjiang Longdi
Company Ltd. that is ever the largest polyester fiber
manufacturer in China, publicly traded in Shenzhen Stock
Exchange Center. The company suffered a loss of RMB188 million
and reported a total sales revenue of RMB826 million. Since 2003
the company has always performed poorly. The company claimed two
reasons that caused loss: Chemical fiber industry remained a
slack trend and the facilities for producing chemical fibers
were increasingly made in China. The company spent RMB700
million to buy the facilities from Germany in 1993, which gave
the company a higher production cost. So I am considering that
the fiber firms in the globe may also be influenced by the high
facilities cost.
   The most important factor that had ever helped Chinese
textile firms to gain their strong competitive edge in the global
market is low cost. Due to the fast economic growth in recent
years, China has gradually lost some advantages in cost. If the
RMB/USD rate climbs up again, textiles firms may completely lose
global market shares.
    Some companies have disclosed their first half earnings
reports. There are hardly any companies reported the influence
of RMB appreciation that took place since last July. But the
influence does exist.
  
Zhong Weike