China’s rising currency hits exports and manufacturing.

Yesterday the China’s currency reached a new high, reaching a rate of 7.1209 yuan to one US dollar following the further decline of the US dollar, the 18th such rise so far this year.

The rise of the yuan has had an impact on the profits of Chinese companies that export their products and has led to the closure of many manufacturing concerns in southern China. The Chinese Securities Journal asserts that a one percent appreciation in the currency results in a loss of two percent in profit margin in the labor-intensive textile industry, the bulk of China’s foreign trade. With forecasts that the yuan will rise 7-10 percent for the whole year this is having a significant impact on export production.

China’s strategy to peg back export growth and so be less dependent on external economic forces is bringing about fundamental changes in Chinese manufacturing. China is now moving away from low-end manufacturing and following in the footsteps of Japan and other Asian tiger economies, starting from a base of low-end, labour intensive industries leading to more skilled hi-tech, high value industries.

New labour laws, have been introduced and taxes for foreign owned companies have been increased, forcing them to seek out cheaper sources of labour in other developing countries. This is evident in the closure of 10 percent of footwear manufacturers in Guandong province and the movement offshore to Vietnam of this type of industry. It is also evident in the decline of the monthly growth rate in exports in January.

China has scrapped rebates for some agricultural products establishing a temporary quota policy on the export of wheat, corn and rice powder when it has needed to ensure domestic supply and stabilise prices.China then, appears to be at a turning point in its development seeming on the brink of a more technologically driven economy.

An interesting article in the journal Japan Focus Yu Zhou posits that:

“two other factors are also at play in China: rapidly emerging competitive domestic firms, and a vast and dynamic domestic market. While the western business world is agog with enthusiasm about a Chinese market that it hopes to dominate, this market, in conjunction with China’s export industry, are creating powerful synergetic forces for indigenous companies. The article concludes that the growth and competitiveness of China’s own technological companies may eventually create more lasting impact on the future global landscape than China’s vaunted labor force.”

In fact companies that are presently being squeezed by the rising yuan are turning to domestic markets to grow their profits. The time may be right for a new focus on innovation and technological development and so move to a whole new level of economic development.

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~ by abstraktbiblos on Friday, 29 February, 2008.

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