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  • Dec 23, 2014
  • Updated: 12:13pm

Canton Fair

China Import and Export Fair, also known as the Canton Fair, is held biannually in Guangzhou every spring and autumn. The exhibition, which has been held every year since 1957, is the largest of its kind in China in terms of scale, variety, distribution of overseas buyers and business turnover.   

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TRADE

Cheaper yuan attracts Canton Fair buyers, but exporters won't count on it

Exporters keen to take advantage of currency's depreciation but won't count on it lasting, vowing to pass any increases on to their customers

PUBLISHED : Friday, 18 April, 2014, 9:31am
UPDATED : Saturday, 19 April, 2014, 12:40am

Olu Adeleke sees the coming weeks as a golden opportunity to shop in China, now that the yuan's protracted appreciation seems to have reversed in the past two months.

Adeleke, a United States-based importer of solar equipment and environmentally friendly lighting products for Nigeria, planned to "buy many products" on his first visit to the Canton Fair in Guangzhou, the twice-yearly mega trade show that began on Tuesday.

The volatility of the yuan increased last month when the People's Bank of China allowed the currency to trade up to 2 per cent - from 1 per cent previously - above or below a reference rate against the US dollar that the central bank sets each day.

We assume the yuan will return to the appreciation track … this year
TIMO XU, ZHONGSHAN LIGHTING BIRD

The yuan has sunk 2.7 per cent since the beginning of the year. It traded at 6.2209 per US dollar yesterday.

"[A lower yuan] will definitely attract more people to source goods in China if it keeps [falling]," said Adeleke, who was evaluating deals on the exhibition floor, where there were about 24,000 exhibitors.

He said he would raise his prices if the yuan appreciates again.

A depreciating yuan means good news for mainland exporters, but some are sceptical the trend will last.

Zhongshan Lighting Bird, a Pearl River Delta maker of wooden lamps exhibiting its products at the fair, expects the currency to gain about 5 per cent over the rest of the year.

"We assume the yuan will return to the appreciation track later this year," said Timo Xu, the company's marketing chief. "We won't swallow a more expensive yuan and will pass the exchange rate difference on to customers."

To mitigate currency risks, the manufacturer is increasing automation at its production base in Zhongshan, minimising its operating costs and rolling out higher-priced products, he said.

Analysts broadly do not expect any sharp depreciation of the mainland's currency, considering Beijing's ambitions to internationalise the yuan as well as warnings from the United States over the currency's recent weakness.

"The yuan deprecation will be short-lived if there is no fundamental change to the one-way capital inflows, especially when China still has a very sizeable current account surplus," ANZ chief economist Liu Ligang said. The current account surplus stood at US$50 billion at the end of last year.

Mizuho Bank said it expects the yuan to depreciate in the short term but return to its usual appreciation trajectory in the second half of this year and reach as high as 6.05 to the US dollar.

On Tuesday, Washington urged Beijing to reduce its intervention in the currency and let markets play a bigger role in setting the value of the yuan. A semi-annual report by the Treasury Department to Congress criticised the PBOC for intervening in the yuan's value by allowing it to weaken against the US dollar.

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singleline
In principle, in the long run, those efficient manufacturing exports businesses will survive and prosper, through constantly raising their productivity, improving their labour's skills, lowering their cost of production, improving their management methods, climbing up the value chain, and so on, while the inefficient enterprises will be weeded out.
But in China, those inefficient and zombie-like mostly-stated-owned enterprises are still protected by the government.
In particular, most of them still have access to the cheap loans provided to them by the policy banks, and those loans are denied to the more innovative and efficient SMEs, which employ the greatest majority of workers in the country.
Facing the triple whammy of rising and severely-overvalued yuan, rising wage rate, and very high borrowing cost in the shadow banking market (and the impossibility to obtain loans even at very high interest cost),
those unfortunate and less efficient businesses (mostly SMEs) will go bankrupt en masse, causing a great rise in the country’s unemployment rate and loan defaults, threatening the country’s banking system and overall systemic stability.
singleline
Suppose the Chinese authority, guided by the ‘mistaken’ free market, keeps on revaluing the yuan in the future, as in the past years.
More hot money will flow into the country, financing those precarious Ponzi projects (especially given the fact that there is still no mass defaults on those wealth-management trust products, entrusted loans, and the like).
The rising yuan and hot money inflow will mutually reinforce each other.
The central bank has to keep on sterilising the capital inflow.
The shadow banking market will be supplied with more capital.
Meanwhile, the Chinese government keeps on raising the minimum wage rate in various Chinese cities.
Both combines to make the yuan even more overvalued than before.
To restore her external competitiveness, internal devaluation will take over to do the job, as in Hong Kong after 1998.
singleline
Similarly, in China, a relatively high investment rate as a % of GDP is still very important to sustain a relatively high economic growth for the country in the coming years.
(****fatasmihov.blogspot.sg/2014/04/secular-stagnation-or-secular-boom.html)
China's rebalancing doesn't mean less investment, it means requiring more investment of the right kind.
(****www.ft.com/intl/cms/s/0/f8ed7dd8-841d-11e3-b72e-00144feab7de.html?siteedition=intl#axzz2zEflTF4O)
singleline
It may be the Chinese government’s policy to gradually weed out the low-value-added mainly-assembly manufacturing exports industries, partly through persistent yuan revaluation over the years.
And many people think that China should rebalance her economy from export- and investment-led growth to domestic consumption-driven growth.
But these objectives by no means imply that the country’s manufacturing industry is no longer important.
Labour-intensive manufacturing industries, facing persistently keen competition both locally and from abroad, have much more incentive to raise their productivity, in the form of raising the workers’ skills, lowering their cost of production, and climbing up the value chain.
A country who starts her economic development from utilizing her natural resources will more easily catch the Dutch Disease,
while an economy who relies mainly on services in her economic development usually experiences slower growth in technological improvement --- a hair-cut which takes half an hour to finish many years ago still takes half an hour nowadays.
Economies which rely on manufacturing industries in their initial stage of economic development, like that of Japan, South Korea, and Hong Kong, can more easily avoid stepping into the middle income trap and further their economic development in the years ahead.
(Chinese readers: ****economy.caixin.com/2014-04-18/100667491.html)
singleline
That said, the four myths mentioned downstairs will continue to prop up time and again in the newspaper, locally and abroad.
Now I know why economics is a dismal science.
singleline
Once again, according to Diana Choyleva at Lombard Street,
in China, '(t)he fact that a “forced depreciation” was able to boost FX reserves so rapidly, meanwhile, in many ways confirms just how overvalued the currency got.
Consider the Swiss case, which saw the SNB (Swiss National Bank) accumulate a huge sum of FX reserves as soon as it began its crusade against an overvalued franc, as another example of the same phenomenon.'
singleline
As a result, even when the yuan has more or less achieved the equilibrium level, China's trade surplus is still normally positive.
No reasonable amount of yuan revaluation can ever reduce China's net exports to zero.
China's present low trade-surplus/GDP ratio doesn't mean the yuan has more or less achieved the equilibrium level.
Instead it means that foreign demand for China's exports are still quite weak, thanks partly to the West's weak economic recovery without rapid employment growth (which in turn is partly caused by their governments' austerity programs.
They should have undertaken more infrastructure investments and the like.
It's said that in the US's air traffic controlling station, vacuum tube is still being used, and this in the 21st century !).
Weaker China's demand for the EM countries' raw materials and energy products also transfers to their weaker demand for China's exports --- a vicious circle.
The yen had appreciated massively after the Plaza Accord enacted in 1985, still Japan's trade surpluses kept on growing in the few years after 1985.
In the past years, the size of China's trade surpluses or deficits were not related to the yuan's revaluation or devaluation (or no movement) either.

singleline
d)
Of all four, this is the most difficult myth to debunk.
Since China is saving more than it is investing domestically,
the country is producing more than it is spending on goods and services,
which means she is having a current account surplus.
In China, the current account is dominated by the trade balance, which is positive --- she exports the rest to the foreign countries.
China’s excess savings necessarily causes the country’s trade surplus, unless her GDP falls, which is not allowed by Li.
Microeconomically speaking, China’s exports manufacturing companies have large fixed costs, accumulated during years of overinvestment.
The low share of labour income, a variable cost in China, reduces marginal costs per unit output relative to fixed costs.
Continued yuan revaluation means lower and lower profits for these companies.
But low profits on large sales are preferable to fatter margins on smaller sales.
In the short term, losses are less from selling below average costs but above marginal than from suspending production.
(From "The American Phoenix")
Especially in China, in the short run, most factory owners do not lay off their workers even when producing at a loss, because the workers are not easily rehired later.
singleline
a)
If a persistent yuan revaluation alone will enable China to successfully internationalise the yuan, and cause the currency to have a status currently enjoyed by the US dollar, then it's too good to be true !
Even the poorest country in the world can do so, simply by constantly revaluing her currency !
The Japanese yen has appreciated quite a lot relative to the US dollar and other currencies after so many years,
but it doesn't seem that the currency is a dominant reserve currency in the world right now.
The US dollar had depreciated quite a lot after the Plaza Accord in 1985, again the currency's status as the world's most important currency hadn't been affected since then.
Obviously, many other factors are at stake in determining whether a currency can achieve a world-dominant currency status.
singleline
c) Continued capital inflow means the yuan will keep on revaluing.
In practice, it’s not just such a simple one-way casuality.
What’s actually happening is a bit more complicated.
FDI aside,
a keep-on-revaluing yuan, coupled with relatively high interest rate in China, will mean continued capital inflow.
'A borrowed dollar flowing into the economy is hard to differentiate from an earned dollar, and thus still impacts the FX rate much in the same way.'
Especially if the exports and imports invoices can be faked.
So, the revaluing yuan and capital inflow are mutually reinforcing each other.
But the one-way capital inflow may one day completely disappear.
A keep-on-devaluing yuan, coupled with a relatively low interest rate in China, will mean capital outflow (or rather, capital flight out of the country).
Once again, the devaluing yuan and capital outflow are mutually reinforcing each other.
Which means, it's China's relatively high interest rate (partly thanks to interest rate liberalization), and the yuan's continued revaluation, which together create the one-way bet, thereby attracting hot-money inflow into China to begin with.
But, should China's interest rate be so high (if the official inflation rate is so low) ?
And should the currency keep on revaluing?

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