Will Currency Appreciation Erode China's Export Dominance?
In June of 2010, China discontinued its de facto peg against the US dollar at 6.83 Renminbi (RMB) per US dollar. The RMB has since appreciated around 2.5% against its American counterpart, with expectations of further rises. It is argued that a dearer currency will make Chinese goods more expensive in international markets, thus reducing the low-cost competitiveness which has propelled China to its current standing as the world’s largest exporter. Yet is it (and will it be) turning out this way?
It must first be remembered that China is only one of many sources of low cost exports. Although the RMB has appreciated against the USD, the most frequently used currency in international trade, so too have the currencies of other top sourcing destinations. Of the ten currencies sampled (see chart below) most have risen in relation their dollar values of a year ago. The Thai Baht, Malaysian Ringgit, Philippine Peso and Mexican Peso are all up by over 5%. Besides two notable exceptions in the Vietnamese Dong and Czech Koruna which have both depreciated by more than 5% vis-a-vis their USD prices one year ago, China has lost little competiveness at this point from having a more valuable currency.
So what about in the months and years to come? How much could China’s currency—or even domestic wages and other cost-adding factors—rise before manufacturers are sought out elsewhere? For China’s most exported goods: likely a lot. Around 45% of China’s exports are electronics and machinery. In these categories, China often offers substantially lower costs than developed nations such as the US, Germany and Japan as well as other low cost countries.
For example, the average FOB price for window unit air conditioners from Chinese exporters in 2009 was USD 186; compare this to USD 235 from number two exporting Thailand and around USD 240 from South Korea, Turkey and the Czech Republic. The average price for a window unit air conditioner exported from the US was far higher, at USD 578. For colour television receivers, of which 56.4 billion worth was traded in 2009, Mexico was the top exporter, China was a close second. However, the price differential between the two countries was not close—USD 376 from Mexico versus USD 84 from China.
Economies of scale might be one reason to expect China to persist as an export hub. There probably aren’t too many places in the world that can host 300,000-man factories. India perhaps, but so far they have been unable to duplicate China’s manufacturing prowess.
If China does experience export losses, it will likely be in the way of textiles and apparel, which will continue trends that have been in operation for a while. The proportion of these goods in China’s total exports has fallen from 20% over a decade ago to around 13% at the end of 2009 (although they are still rising in absolute value). Recently, higher wages and cotton prices have forced some Chinese clothing manufacturers to raise prices or operate at a loss which may eventually result in plant closures and fewer exports.
In contrast, Vietnam is rapidly rising in this category, perhaps even more so due to devaluations in its currency. Although its textile and apparel exports are only one tenth that of China, the value of Vietnam’s outbound trade in this category is up over four-fold in only the last decade. Lower capital requirements to produce textiles and clothing, compared to machinery and electronics, make the production of these goods a viable way for less developed nations like Vietnam to move up the value added chain, displacing countries such as China.
Such competition, however, is unlikely to diminish China’s overall export position in the near future. Keep in mind that for every shoe factory that closes in China an automobile plant or solar cell factory is going up, thereby offsetting losses in one export category with gains in another. A rising RMB is only an adjunct to this process.
In short, China's export dominance can accommodate a gradually strengthening RMB for a long time still.
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