The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Buyers at Canton Fair fear unstable yuan after move to widen trading band
Robert Fitzpatrick has been a worried man ever since the news of a wider yuan trading band reached the Canton Fair.
The Australia-based trader, who imports car parts from China, has been making a neat pile in the past couple of years, riding on the strength of the Australian dollar against the yuan.
He fears the doubling of the daily trading band of the yuan against the US dollar to 1 per cent will mean wider swings for the Chinese currency, which may appreciate further and erode his cost advantage.
Mingling with suppliers in the exhibition hall in Pazhou, Guangzhou, Fitzpatrick is treasure-hunting for new products at the 111th Canton Fair, the nation's largest trade show. The biannual event's official name is the China Import and Export Fair.
This is Fitzpatrick's 30th visit to the fair, which has been running since 1957 and now showcases products ranging from bathroom tiles, lights and refrigerators to watches, garments, machinery and food products from more than 24,000 exhibitors.
The fair, which opened on Sunday and is split into three phases covering different product categories, is expected to attract at least 200,000 buyers from around the world before it closes on May 5.
'People at the fair are talking about the yuan's situation,' Fitzpatrick said. 'It's going to hurt a lot of people as it becomes less stable.'
Commerce ministry spokesman Shen Danyang conceded that exports would be affected by a more volatile yuan and that some buyers at the fair were so worried about a more unpredictable currency that they were not placing long-term orders. 'It will be more difficult to predict the yuan,' Shen said. 'This creates a certain degree of challenge to exporters and traders, who have got used to a stable currency.'
But he added that widening the yuan's trading band was a key step in currency reform and in combating unusual, and unstable, capital flows - so-called hot money.
Exhibitor Zhong Kai International, a producer of silicon keyboards and drums, had already factored in a stronger yuan when setting prices, said sales representative Seven Chen.
'Our prices are based on an exchange rate of 6 yuan to the US dollar by the end of this year,' Chen said. 'We have to raise prices in advance to hedge against the potential appreciation of the currency.'
The yuan has gained 30 per cent against a basket of currencies since it was depegged from the dollar in 2005. It closed yesterday at 6.3015 per dollar. Economists at BBVA and Nomura say they expect the yuan to strengthen by a further 2 to 3 per cent by the end of the year, while Citigroup anticipates a 1 to 2 per cent appreciation. Societe Generale forecasts the yuan will reach 6.22 per dollar by December.
The prospect of a stronger yuan, soaring wages, higher raw material costs and a government-induced industrial upgrade continue to squeeze manufacturers. But passing the extra costs on to buyers has become more difficult, as buyers are demanding lower prices amid the euro-zone debt crisis and with demand in the US weak. As a result, bargaining, once commonplace, is now a thing of the past at the Canton Fair.
'The bargaining process has become much shorter,' said French home appliances buyer Oliver Gastin. 'Suppliers just say no to lower prices.'
Gastin said freight costs between China and Europe had doubled, adding at least 5 per cent to costs. 'China must protect itself against inflation by not allowing the yuan go up too much,' he said. 'The French economy is not in a good situation, and I need to source products with the best prices possible.'
Electronics buyer Intersys, from Greece, is also finding it increasingly difficult to source merchandise from China, caught between weak demand at home and soaring prices in China, said marketing director Petros Bouligarakis. 'Business was down 50 per cent last year,' Bouligarakis said. 'Factory-gate prices have risen, currency exchange rates have been unstable and freight costs have doubled in the past few months.'
According to Zhang Xiaoke, a research and development manager at Jiangxi Jiangqiao Timber & Bamboo, which makes bamboo products, the firm has been trying to innovate its way out of the problems of wage increases, yuan appreciation and labour shortages. As bamboo, a renewable material is an alternative to plastic, Jiangxi Jiangqiao has been launching new products, such as bamboo casing for iPhones and bamboo computer keyboards and mice. 'We have increased the level of automation, minimised wastage and diversified usage of bamboo to offset higher costs,' Zhang said.
The firm, which has automated 90 per cent of its production, from 70 per cent two years ago, managed to offset a 15 per cent increase in wages this year, he said. This contributed to a halving in the factory-gate price of bamboo computer keyboards to US$20.40 each.
Many other manufacturers have been trying to cut costs by moving factories inland or to Southeast Asia.