Exports strong in face of Yuan

[rffrydr]

FT

Politically currency appreciation is far from the magic bullet. Even textiles matching rising yuan:

Byline: RICHARD MCGREGOR

BEIJING -- Chinese exports have become more profitable in the 18 months since the revaluation of the renminbi, as industry has lifted productivity and moved into a growing range of higher-value-added products.

The rise in profits and volumes of Chinese exports comes despite an appreciation of about 6.5 per cent of the currency against the US dollar since mid-2005, and sharply higher prices for most raw materials.

The margins for textiles, electronics and machinery goods, which together account for 60 per cent of exports, all increased last year compared to 2005, according to figures compiled by Deutsche Bank.

The extra cash garnered by exporters confounds the arguments of domestic opponents of currency revaluation, who have argued that any rise in the renminbi would erase the small profit margins of exporters.

The competitiveness of China also underlines how any focus by the US in trade talks on the currency alone will not be effective in rebalancing economic ties.

The new figures show margins rising even in the textile industry, albeit slightly, from 3.5 to 3.6 per cent in 2006. The sector has long been the most overcrowded and under pressure from currency appreciation.

The figures confirm other recent studies by UBS and the World Bank that show China exporting a much wider range of goods than a decade ago and at higher prices in the last two years.

"China's export sector is experiencing a rapid structural upgrading in areas including technology, product mix and marketing," said Jun Ma, Deutsche Bank economist. "Most visibly, many textile, machinery and auto parts companies have dramatically expanded their product categories, which helped enhance their pricing power and profit margins."

Combined with investment in new technology, the dominance of Chinese companies in some industries may also be giving them more pricing power. The fastest growing export sectors in 2006 were aircraft parts, shipbuilding, integrated circuits, cars and car parts, electrical machinery and telecoms equipment.

The resilience of the export sector shows up in the politically sensitive trade surplus, which has grown rapidly over the last two to three years, nearly doubling, according to China's own figures, to reach Dollars 177bn (Euros 135bn, Pounds 90bn) in 2006.

China broke its peg with the US dollar in mid-2005 but has kept a tight grip on the currency since then to allow local companies to adjust to a more flexible regime.

But while the renminbi has appreciated against the US dollar, it has moved much less when measured against a basket of international currencies, another reason for the minimal impact on exports.

Besides the currency, the rising cost of labour and land had been expected to put pressure on businesses, but they seem to have had little impact on the export sector thus far.

Beijing's demand for tighter environmental controls has also not been a significant burden, perhaps because of lax enforcement.

Gao Shanwen chief economist at Everbright Securities, said strong external demand in markets such as the US continued to buoy exports. "Labour productivity has also grown over the last two years."
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