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The Limitation Of RMB Appreciation From The Perspective Of Shoemaking Enterprises

2008/8/4 15:35:00 41753

Some people believe that the appreciation of the renminbi will help the US reduce its trade deficit with China.

However, from the cost and pricing situation of a shoemaking enterprise, you will find that this idea may be just wishful thinking.

The example of Yue Yuen (Industrial) Holdings, the world's largest sports shoe manufacturer in the world's 17% sports shoes market and Hongkong listed company, should fully reflect the obvious cost pressure brought by the appreciation of RMB.

The shoe factories of the company are basically located in mainland China, and are typical labor-intensive enterprises.

However, Yuyuan group management estimates that if the RMB exchange rate against the US dollar rises by 5% as many analysts expect, their total cost will only increase by 1%.. The total cost of the company in 2004 is US $2 billion.

Ye Mingzhong, director of investor relations at Yuyuan group, said that, as calculated last year, the cost of growth was very small. Terry Ip said.

People in developed countries who call for appreciation of the renminbi believe that the current RMB's ratio of US $8.28 to US $1 is actually pegged to the US dollar, which in fact makes the value of the RMB undervalued, which gives Chinese exporters an unfair trade advantage.

According to their theory, if China lets the renminbi appreciate, then the price and cost of its export products will rise, and the competitiveness of the overseas market will be weakened.

Although China last year withstood all kinds of pressure to ask for appreciation of the renminbi, many economists expect that China will let the renminbi appreciate at some time this year, and they estimate that the appreciation will be between 3%-7%.

Last week, China announced that the issue of RMB would be discussed at the finance ministers' meeting of the seven major industrial countries (G7) to be held this week.

But the key is that for many Chinese exporters, the cost of Renminbi payment is usually only a small proportion of their total cost.

About half of the raw materials of most manufacturers come from imports.

JP Morgan (J.P. Morgan) economist Wu Xianghong (Grace Ng) said that the appreciation of the renminbi could actually make the cost of raw materials relatively lower, thus countering the rising cost of domestic raw materials.

In fact, even the Chinese textile industry with a profit margin of only 3%-5% will not be significantly affected by the appreciation of the renminbi. The labor cost and general management cost of the industry also account for only 30%. of its total cost. Wu Xianghong said that even if the appreciation of the renminbi was 7% (the highest expected increase in all kinds), the corresponding increase in clothing prices was only 2%.

Moreover, after the abolition of the global textile quota system in late 2004, the management cost of China's textile export enterprises will be reduced, and export growth will increase, which will also reduce the impact of currency appreciation on their product prices.

Take Yuyuan group, headquartered in Southern China manufacturing base, Dongguan as an example.

According to the company, the cost of its product is 16%-20% in Renminbi, mainly for people's wages and utilities.

The cost of raw materials accounts for 63% of the cost of manufactured goods, most of which are paid in dollars, even in local purchases.

Therefore, Eddie Lau of ABN Amro said that if the renminbi appreciated, it would undoubtedly have a negative impact on Yuyuan group's profits, but the impact would not be obvious.

Yuyuan group's example shows that after the appreciation of RMB, China's low-cost manufacturers are unlikely to substantially increase their export prices.

In the past week, Yuyuan group, which has always been popular with investors in the stock market, announced that the profit for the 2004 fiscal year has dropped for the first time in 12 years, one of the reasons is that oil prices have risen sharply.

Last year, the cost of petrochemical materials used by Yuyuan group to produce soles increased sharply due to the rise in oil prices. In the year ended September 30, 2004, Yuyuan group's net profit fell 1.6%, to $303 million (18 cents per share), which was lower than analysts' expectations by 4%..

Ye Mingzhong said that although the cost has risen significantly, the average price of the company's products has gone up very little, almost negligible.

Analysts are puzzled.

Yu Yuan has big customers like Nike (Nike) and Adidas (Adidas). Its market share has been rising, and its strongest competitor has only 1/4 of its production scale.

Such a Chinese manufacturer, who has always been considered the most capable of passing the cost increase to consumers, is why its product price increase is not as good as 1/3 of the cost increase.

Angel Jeanine Angell, a Merrill Lynch analyst, said Yu's inability to remind people that the mainland's main production base actually had little initiative in pricing.

After Yuyuan group announced its performance, Angel lowered its profit forecast in 2005 and 2006 by 15% and set its stock rating as selling.

In her research report to her clients, she said, in her view, the management of Yuyuan group has difficulty in pricing products.

Angel said that if manufacturers can not pfer the impact of rising cost of raw materials to customers, then they want to pass on the increase in public utility fees and labor costs brought about by the appreciation of the renminbi, which is a "very difficult thing".

Yuyuan group revealed that the average selling price of its products increased by 2%-3% in the first quarter of this year. The company also said it was difficult to determine whether more additional costs could be added to the customers' heads.

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