China's rising yuan squeezes exporters, raises concerns over jobs and growth
China's strengthening yuan is squeezing exporters' profit margins, raising concerns over job losses, weaker exports and slower economic growth. Beijing faces a policy dilemma as international pressure to let the currency appreciate clashes with do...
By Anupam Nagar, ETMarkets.com |
ETMarkets.com
A stronger yuan is putting China's exporters under growing pressure.
China's strengthening yuan is squeezing exporters' profit margins, raising concerns about job losses and economic growth as Beijing faces mounting international pressure to allow its currency to appreciate further.
The yuan has gained nearly 5% against the US dollar and around 9% against the euro this year, making Chinese products more expensive for overseas buyers and adding to manufacturers' cost pressures.
According to Reuters, exporters are increasingly worried that further appreciation could threaten their survival.
Read more: Why did US stocks crash? Trump blames Democrats as AI regulation fears rattle markets
The situation presents a dilemma for Beijing. European leaders and the International Monetary Fund argue that the yuan remains undervalued, giving Chinese exporters an unfair advantage. However, Chinese policymakers fear a stronger currency could hurt manufacturers, trigger job losses and weaken exports, a key driver of economic growth.
The People's Bank of China (PBOC) recently raised the foreign currency reserve requirement for financial institutions, signalling concern over the yuan's rapid appreciation. Other possible measures include weaker daily currency fixings and further increases in reserve requirements.
Read more: Japan's Nikkei slumps more than 5% as market rout deepens on AI worries
A Reuters analysis of 5,209 Chinese-listed companies found their median net profit margin stood at 4.9% in the first half of the year, compared with 8.9% for global competitors.
Standard Bank estimates that every 1% appreciation in the yuan's real effective exchange rate reduces average export margins by around 30 basis points.
Manufacturers are also struggling with domestic overcapacity and intense competition. Chen Xiujun, chairman of Fujian Hoshing Plastic, said these pressures had forced his company to seek overseas customers, where the stronger yuan was further hurting profitability.
However, Beijing is unlikely to welcome rapid appreciation, particularly as weak domestic demand and thin corporate margins already weigh on manufacturers.
Economists remain divided over whether a stronger yuan would address China's trade imbalances. While some argue appreciation could improve household purchasing power, others warn it could deepen deflationary pressures without stronger domestic consumption.
Chinese manufacturers are already struggling to absorb rising costs, with one sanitaryware factory owner saying profit margins had been squeezed to the bone.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)
The yuan has gained nearly 5% against the US dollar and around 9% against the euro this year, making Chinese products more expensive for overseas buyers and adding to manufacturers' cost pressures.
According to Reuters, exporters are increasingly worried that further appreciation could threaten their survival.
Read more: Why did US stocks crash? Trump blames Democrats as AI regulation fears rattle markets
The situation presents a dilemma for Beijing. European leaders and the International Monetary Fund argue that the yuan remains undervalued, giving Chinese exporters an unfair advantage. However, Chinese policymakers fear a stronger currency could hurt manufacturers, trigger job losses and weaken exports, a key driver of economic growth.
The People's Bank of China (PBOC) recently raised the foreign currency reserve requirement for financial institutions, signalling concern over the yuan's rapid appreciation. Other possible measures include weaker daily currency fixings and further increases in reserve requirements.
ADVERTISEMENT
Read more: Japan's Nikkei slumps more than 5% as market rout deepens on AI worries
Chinese exporters face mounting pressure
A stronger yuan could disproportionately hurt labour-intensive industries such as textiles and home appliances. Goldman Sachs expects the currency to strengthen to 6.40 per dollar over the next 12 months from around 6.70 currently.A Reuters analysis of 5,209 Chinese-listed companies found their median net profit margin stood at 4.9% in the first half of the year, compared with 8.9% for global competitors.
Standard Bank estimates that every 1% appreciation in the yuan's real effective exchange rate reduces average export margins by around 30 basis points.
ADVERTISEMENT
Manufacturers are also struggling with domestic overcapacity and intense competition. Chen Xiujun, chairman of Fujian Hoshing Plastic, said these pressures had forced his company to seek overseas customers, where the stronger yuan was further hurting profitability.
Beijing resists currency pressure
The IMF estimated in July that the yuan was undervalued by 17.3% to 25.3%, intensifying calls for China to allow its currency to strengthen.ADVERTISEMENT
However, Beijing is unlikely to welcome rapid appreciation, particularly as weak domestic demand and thin corporate margins already weigh on manufacturers.
Economists remain divided over whether a stronger yuan would address China's trade imbalances. While some argue appreciation could improve household purchasing power, others warn it could deepen deflationary pressures without stronger domestic consumption.
Chinese manufacturers are already struggling to absorb rising costs, with one sanitaryware factory owner saying profit margins had been squeezed to the bone.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)
Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
Bookmark or read stories offline -
Download ET Markets APP
Download ET Markets APP
ADVERTISEMENT
