RMB Appreciation Is Bothering Import And Export Shoe Enterprises

October 13th, on the one hand,

In the wake of almost all sides of the world urging, oppressing or looking forward to the appreciation of the RMB exchange rate, the international community has overlooked one of the most fundamental and important facts: the real purchasing power of the renminbi in China has dropped sharply in recent years.

What is the internal derogatory and external misplacement of RMB?

In recent years, China's domestic food and consumer goods prices have risen sharply, the prices of raw materials and wages have been rising, and real estate prices are soaring nationwide.

This shows a very simple economic common sense: a dollar now is less valuable than the yuan in the past. For example, in 2005, a shoe factory in China basically needed only 50 yuan of raw materials, wages and other costs to produce a pair of Nike sneakers. In 2010, it might take 60 yuan or even 70 yuan to produce a pair of the same quality shoes.

But why did the international media and public opinion almost unanimously request the appreciation of the renminbi? The reason is also simple: the prices of Chinese exports are too cheap.

In the case of Nike sports shoes, the cost of production in the United States may not be produced at about 7.5 US dollars equivalent to the current exchange rate (1 US dollars to 6.7 yuan) equivalent to 50 yuan, and it may cost US $20 in production cost.

As a result, the exchange rate of the RMB against the US dollar must rise to 1 yuan to 2.5 yuan, and the United States will be able to produce Nike sports shoes with the cost equivalent to 50 yuan equivalent to 20 dollars.

Therefore, the American shoemaking companies will certainly think that the low price competitiveness of China's export products comes from the undervaluation of the RMB exchange rate.

In fact, the exchange rate of RMB against the US dollar has risen from 1 US dollars in 2005 to 8.27 yuan, rising to 1 yuan in early October 2010 to 6.68 yuan, or about 20%.

Of course, for those who want to rally the US manufacturers and Chinese manufacturers to raise the cost of US dollar quotations for similar products, the appreciation of the RMB exchange rate over the past few years is far from enough.

The plight of Chinese exporters

The internal derogatory effect of RMB is a substantial increase in the production cost per unit product of RMB in China for a large number of exporters of manufacturing products.

Faced with fierce market competition, China's exporters only have to choose to compress export earnings and suffer self - suffering from rising costs of Renminbi production.

Take the production of Nike shoes as an example, when the production cost rose from 50 yuan in 2005 to 60 yuan in 2010, in order to guarantee long-term export agreements, it could only be exported at the US dollar in 2005.

China's numerous exporters are forced to make huge profits in order to maintain orders in the export market under the sharp rise in domestic production costs in Renminbi.

As a result, the annual export profits have squeezed the export profit margins of China's numerous exporters to no lower level.

During his recent visit to the United States, Chinese Premier Wen Jiabao also admitted that most Chinese exporters had only 2% gross margin on their exports.

If the RMB exchange rate is rising by 3%, countless Chinese exporters will be totally unprofitable or even lose money after the export to the US market in 2010.

Obviously, China's export commodities are facing the double predicament of the RMB's internal derogation and rising dislocation. On the one hand, the decline in domestic purchasing power of RMB has led to a sharp rise in the cost of production in Renminbi. On the other hand, the appreciation of the renminbi against foreign currencies has led to a sharp decline in the actual Renminbi yield of export products that are steadily priced in foreign currencies all the year round.

As a result, the profit margins of exporters are decreasing rapidly while China's exports earn new heights.

Under the predicament that the profit margin of the unit export is dropping to a very small level, the strategy for the exporters is to expand the scale of production.

As a result, Foxconn has produced hundreds of thousands of export manufacturers, trying to minimize the upward pressure on the cost of production in Renminbi by means of various means, and to maintain the total profit of exports by increasing the volume of large-scale exports.

When the developed countries are enjoying the cheap Chinese products, countless Chinese workers who export their products are busy day by day on the production line with the unimaginable working intensity of the developed countries.

This is the basic mode of China's export earning.

The appearance of the Foxconn incident indicates that this mode has basically reached the limit.

{page_break}

The internal dislocation of the renminbi has given the capital market speculators huge arbitrage space.

Just imagine if investors can convert $1 million to 8 million 300 thousand yuan in 2005 with us $1 to 8.3 yuan, and then invest RMB in Shanghai's real estate in China.

By 2010, the market value of investment in real estate has also doubled to 16 million 600 thousand yuan.

If the investor will invest in real estate and then convert the 16 million 600 thousand yuan into US dollars in accordance with the exchange rate of US $6.7 in 2010 to US $6.7, we can get about $2 million 480 thousand.

The return on investment is close to 150%.

Of course, this investor may prefer that the US pressure the RMB appreciation to succeed, the renminbi can revalue more, and at the same time, China's housing price rise "up to the next level", his speculative arbitrage income can be far more than 150%.

This is a very typical speculative arbitrage relying on the misplacement of internal derogatory.

Such an example is by no means an Arabian tale.

According to research from various sources, the hot money flowing into China accounts for almost 40% to 50% of China's 2 billion foreign exchange reserves.

Of course, there are also hot money to enter China through numerous "underground" channels.

As a result, the hot money entering China's speculative arbitrage is less than trillions of dollars. The speculators of these hot money eagerly look forward to a substantial appreciation of the RMB as soon as possible, so that they can arbitrage profits multiplied by speculation.

In the 5 years from 2006 to 2010, the renminbi assets invested in trillions of hot money have multiplied.

If people are expected to revalue 10% to about 1 US dollars to 6 yuan in 2011, it will not only be the hot money of 1 billion US dollars that flows into China by arbitrage, but will be 2 trillion, 3 trillion or even more dollars of the doubled arbitrage income exchanged at the new exchange rate. This will be an unprecedented cross-border capital flow in international monetary and capital markets.

Its scale will far exceed the scale of international capital escaping from the Asian market in the Asian financial crisis of 1997/98.

It is unthinkable that its impact on the international capital market and the consequences of the global real economy will be hard to imagine.

Hundreds of millions of Chinese nationals have also participated in the "big bet" under the situation of depreciated or misplaced Renminbi.

Take only the real estate of China's so-called first tier cities, such as Beijing, Shanghai and Guangzhou, for example, at least hundreds of millions of residents have spent many decades of hard savings in real estate, consciously or unconsciously pushing the property of these cities to the "sky high" level that speculators are willing to see.

What is worth sympathy is that those wage earners are forced to borrow heavily from banks to buy houses and become trapped in debt difficulties that are difficult to extricate themselves for life.

Of course, the RMB market value of the so-called "assets" that we invest in is booming. It is even more imaginable that the RMB will one day increase substantially abroad. Countless Chinese citizens have forgotten the hardships of real life and have been comforting their hearts with the illusion of "millionaire" in the future.

But any "big gamble" will eventually come to an end.

A substantial appreciation of the renminbi will be the prelude to this "gamble".

At that time, a few Chinese nationals who have convenient and quick way to cash in will probably succeed in arbitrage and escape like international hot money speculators.

But more Chinese nationals will be trapped in the discarded "gamble" battlefield, and the "million dollar dream" is disappearing.

The appreciation of the renminbi will surely lead to several joys and worries.

It is unavoidable for any country or individual to view the issue of RMB appreciation in its own interests, so that it is impossible to reach a consensus on the cognition of "who will harm the interests of the people".

Even in the next 5 years, if the RMB appreciates another 20%, there will be strong forces in the international community and continue to suppress the appreciation of the renminbi.

However, any country or individual must face up to the fact that the renminbi has been derogatory and outward rising, and clearly recognizes the continued expansion of this dislocation pattern, which may bring huge shocks to China's economy and the global economy.

Whether the world economy, which has just experienced the global financial crisis, still has the strength to endure this great shock is really worth deep suspicion and concern.