China's textile industry will start to lose money if the yuan continues to appreciate, the country's top economic planner warns.
"With their average profit margin currently at 3 per cent, textile companies will no longer be able to absorb the cost of the rising yuan," said the report by the National Development and Reform Commission (NDRC).
The dire prediction came as the Chinese currency Monday hit a new high against the US dollar since a revaluation a year ago.
The People's Bank of China set the reference rate for the renminbi against the greenback at 7.9499. It closed at 7.9385 at 5:30 pm in Shanghai.
It was a record after China allowed its currency to appreciate by 2 per cent in July last year to 8.11 against the US dollar and linked it to a basket of currencies instead of the greenback alone.
The reference rate is an indicative mid-point for the yuan exchange rate, from which the currency can move within a 0.3 per cent floating band, either up or down, each day.
The currency has been strengthening gradually over the past 13 months and rose by a further 2 per cent since the revaluation.
The market forecast is that the yuan would appreciate by another 3 per cent against the US dollar, to 7.72, over the next 12 months.
Top Goldman Sachs economist Sun-Bae Kim has made an even bolder prediction, saying that the yuan would rise 6 per cent in 12 months.
"If the appreciation continues, the profit margin (of textile exporters) will be eaten up within a year," the NDRC report said.
Chinese textile manufacturers have been marking down their prices this year to sustain exports and offset the negative impact of the rising yuan, said the report.
Citing research by Guotai Jun'an Securities Research Institute, the commission stressed that a 1-per-cent appreciation in the yuan would lead to a loss of 2 per cent in profit margins. In sectors heavily dependent on exports such as cotton, wool and fabric for home use, the decline could be as much as 6 per cent, it said.
As exporters earn only an average of 30 US cents from the export of a shirt, the appreciation of the yuan underlines the need for textile manufacturers to sustain their competitiveness through technical innovation and intellectual property rights protection rather than through price cuts, said Li Lingmin, vice-president of the China National Textiles Imports and Exports Corporation.
The growth rate of China's textile exports has slowed but they still rank the highest in the world.
From January to July, exports reached about US$27 billion, up 18.7 per cent on the previous year. The growth rate is 4.3 percentage points lower than the previous year and 3.1 percentage points lower than in January.
Economists said the trend of yuan appreciation is likely to be maintained, given the strong growth of the Chinese economy, rapid increase of foreign exchange reserves and trade surplus, and in particular, a strong expectation of further appreciation of the renminbi.
But Wang Xiaoguang, a senior researcher at the Academy of Macro-economic Research affiliated to the National Development and Reform Commission, said further appreciation should be avoided because it will not help set right the imbalanced structure of the economy or curb overheated investment.
A slow appreciation also does not work because it would strengthen the expectation of further appreciation of the currency and nurture speculation by domestic or international capital, Wang wrote in an article published in Shanghai Securities News on Monday.
He suggested China make it clear that maintaining a stable yuan exchange rate in the medium and long term is a premise for stable economic growth in the long run.
The authorities should promise to increase the flexibility of the foreign exchange rate regime and stress that the yuan will not move in only one direction, he said.