Wednesday, May 12, 2010

Would revalution of Chinese currency impact its exports?

Continuing the earlier discussion on the value of Chinese yuan, here is another article from the Wall Street Journal Asia, that finds that given the nature of Chinese exports, a 5% re-valuation would barely add 25 cents to the price of a T-shirt sold in the US. Joseph Sternberg's article, "The Irrelevant Yuan?" was published on 5 May 2010. Here are a few excerpts.
To some in Washington these days, adjusting the yuan-dollar exchange rate is the fix for all America's ills. That single number supposedly determines which jobs stay in the United States and which go to China. It dictates which and how many goods move where. It's attributed the mystical power to raise or destroy mighty economies by its movements or lack thereof.

Except that the real world doesn't work that way. Recent conversations with executives responsible for supplying clothes from Asia to American shelves suggest that the yuan case may not be as clear-cut as U.S. revaluationists would have us believe... ...

Revaluationists implicitly, and wrongly, assume that the bulk of the value of Chinese products is exposed to the exchange rate. If that were true for any industry, it would be true in apparel where yuan-denominated labor still accounts for a much higher proportion of costs than in more mechanized manufacturing. Yet it ain't quite so, as an American executive at a children's clothing retail chain recently explained. (He and the other executive in this piece asked to remain anonymous given the political sensitivity of the issue.)

This executive's largest expense is fabric, which accounts for roughly 50% of the final cost of a piece of clothing. He also figures in a profit margin of about 15%, depending on the product. That leaves 35% of his cost for labor, utilities and the like—yuan-denominated expenses. As for the fabric cost itself, about half of that (one-quarter of the cost of the finished garment) is cotton, a globally traded commodity priced in dollars. The fabric manufacturer also might take a 15% profit, leaving 35% for yuan-denominated costs.

So take a $10 pair of boy's summer shorts: $2.50 is cotton, the price of which won't change with a revaluation. Another $2.50 (perhaps) is profit. That leaves roughly $5 in Chinese labor and other yuan costs that are affected by a revaluation. Subject that portion to the 5% revaluation (that's at the upper range of current expectations for what Beijing will do) and the shorts now cost . . . $10.25.

That assumption of a surprisingly large profit margin is significant, as a chat with another American businessman makes clear. His company sells a range of brands, from high-end to low-end, and manufactures throughout Asia. When asked about the possible effects of a yuan revaluation, he first observes that his company no longer makes its cheapest products in China anyway. Rising labor costs, higher taxes on foreign businesses and the like have pushed ultra-low-price T-shirts and jeans to the likes of Vietnam or Bangladesh. What remains in China are higher-value-added, more profitable name-brand products... ...

In response to Joseph Sternberg's article, Michael Ludd, a lawyer based in Hong Kong wrote an interesting letter to the editor at WSJ.

Take a pair of jeans made in Thailand for $3.19 a pair. Shipping those jeans to the United States adds about 50 cents of cost to each pair, after accounting for freight and insurance. At brand-name stores in the U.S., a pair of those jeans sells at a retail price between $37 and $79 (plus delivery, if the purchase is made on the Internet).

The mark-up in price captures the real value added by the intellectual property of the design, advertising, distribution and financing—all services often provided by U.S. companies, in dollars. Taking the higher retail price, less manufacturing and shipping, about $75.31, or 91% of the final price is attributable to service businesses and of course profit.

The value of the yuan in this process is almost immaterial.

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