A recent sharp rise in the yuan against the euro is the latest thorn in the side of Chinese exporters, putting more pressure on policymakers to come to their aid.
The yuan has marked time against the dollar since the middle of the year. It has traded in a tight range of 6.82 to 6.85 since mid-July after Beijing called a halt to a steady climb that began when the yuan was revalued and floated in July 2005.
But that stagnation has belied a rapid rise in the currency's trade-weighted exchange rate, as it has piggy-backed on the dollar's broad strength in the wake of a flight to safe assets prompted by the global financial crisis.
The yuan is now trading around 8.8 to the euro, the currency of China's largest trading partner, up roughly a quarter since mid-July. It rose as high as 8.45 last week.
“There is no doubt that some of these exporters must be hurting,” said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.
“Particularly the ones who probably tried to hedge against yuan strength in the first half of the year by invoicing in euros. They've now had those positions reversed on them.”
The yuan's real effective exchange rate (REER) -- measured on a trade-weighted basis and adjusted for inflation -- has never been stronger since 1989, according to Standard Chartered Bank.
The International Monetary Fund and the Group of Seven industrial nations have long clamored for such broad-based appreciation to help reduce global economic imbalances.
The jury is still out on just how much the yuan's strength will affect China's exports to the European Union, which grew by 25.6% in the first nine months of 2008 to $220.5 billion.
After all, other currencies that are closely linked to the dollar have risen as well, and few competing countries can match the breadth and depth of China's manufacturing base, meaning any shift in sourcing by European importers is unlikely to be abrupt.
Yet coming in the face of a slump in demand in the West, as shown by a drop in new export orders in a pair of manufacturing surveys for October, the yuan's surge against the euro poses a stiff new test to firms already surviving on ultra-thin margins.
They are starting to make their voices heard.
Trade publications and industry websites have begun to highlight the euro's weakness as a big problem for exporters, particularly in cut-throat industries like clothing and shoes, where export growth has virtually slowed to a halt this year.
In a sign that the issue is coming onto Beijing's radar as well, the official China Securities Journal ran a banner headline on Wednesday stating that the yuan's REER rose 3.08% in October alone, citing Bank for International Settlements data.
“The euro's depreciation against the yuan will have a serious impact on our country's exports,” the newspaper said.
It estimated that between 20% and 30% of Chinese import-export firms settle their accounts in euros.
“These firms need to come up with plans for safeguarding their earnings to cope with the weakening euro,” it said.
While they do not suffer a direct hit by earning euros, even firms that invoice in dollars are finding that their competitiveness has been eroding along with the weaker euro.
A manager named Weng with Yuandong Feather Co Ltd in the eastern manufacturing mecca of Wenzhou, said margins for exports had turned negative; the firm was filling orders only in the hope that customers would stay loyal for when conditions improve.
“Right now, we are trying not to accept any new orders, because once we accept them we are doomed to lose money,” said Weng, who declined to give his full name.
The government has already increased export tax rebates for a range of mainly labor-intensive products, hoping to avoid widespread layoffs that could undermine social stability.
Wang Liming, a director with the Ministry of Industry and Information Technology, said tax rebates for labor-intensive exports are likely to rise by another 1%age point, the China Securities Journal reported on Thursday.
The main consequence of exporters' pain will probably be to stiffen resistance for a renewed rise in the yuan against the dollar as long as the US currency remains strong.
Tao Wang, China economist with UBS in Beijing, said she expects the yuan to stay roughly unchanged against the dollar because of concerns about slowing export growth; the key would be whether the euro and emerging market currencies kept falling.
“Further such large movements may lead to modest (yuan) depreciation against the (dollar) over the next 12 months,” Wang wrote in a note to clients.
David Mann, a senior currency strategist with Standard Chartered Bank in Hong Kong, said he expected the dollar to edge up over the next few months, potentially reaching 6.90 in 2009.
However, Mann said he still expected the yuan to appreciate against the dollar over the long run because Chinese exports continue to be competitive, as reflected in record monthly trade surpluses and a continuing build-up of foreign exchange reserves.
“I think that's partly why we never saw particularly aggressive appreciation before and why, while the dollar remains so strong, they may be reluctant to move the currency against the dollar as well, because that would just amplify the moves we're already seeing on a trade-weighted basis.” (Reuters)