RMB Appreciation Hits Foreign Shoe Companies

Near the Spring Festival of 2008, Xu, chief of a shoe company in Nancheng District, Dongguan, Guangdong, did not have the slightest joy. "Last month, we produced 800 thousand pairs of shoes, which cost US $3 million, but this month only produced 500 thousand pairs of shoes, but the cost was 4 million dollars."

"He told reporters reluctantly.

His shoe factory has more than 4000 employees and produces almost all the shoes sold to the United States.

"The cost is rising too fast," Xu said. "It has lost about 10000000.

"The cost of human resources in his factory rises, the price of raw materials rises, and electricity is sold every few days, while the price of shoes sold to the United States does not increase. Moreover, because of the appreciation of the RMB exchange rate, the amount of money received in US dollars is relatively depreciated.

Since the reform of the RMB exchange rate formation mechanism, the RMB has appreciated by about 13% against the US dollar, especially in 2008. The appreciation of RMB has further accelerated, and the appreciation in January alone was as high as 1%.

The rapid appreciation of RMB has brought a great impact on some export oriented enterprises. In Huizhou's shoe industry and the National Women's shoes production base, Jilong Town, in 2007, due to rising costs and declining profits, there were about 300 shoe factories that were pferred and closed in that year (only more than 400 of all shoe factories in the town).

Overseas media reports blamed the phenomenon on the excessive appreciation of the renminbi.

How much impact does the appreciation of RMB exchange rate bring to enterprises? Is there really a large number of enterprises to go bankrupt or move out? These problems are deeply concerned by the central bank and relevant decision-making departments.

Because the necessity of accelerating RMB appreciation has become a common understanding. The appreciation of RMB is generally regarded as an important way to solve the difficult problems of overheating and inflation in China. In 2008, the reform of RMB exchange rate formation mechanism will continue to advance. How will the appreciation rate of RMB be appropriate will become a hot topic in all circles.

With these questions, reporters conducted an investigation in Guangdong, China's first foreign trade province.

In 2007, the total value of Guangdong's imports and exports accounted for 29.2% of the whole country, and the trade surplus reached 39.8% of the whole country. Guangdong's sample is undoubtedly representative in the whole country.

"For our company, the most important factor that affects the cost and profit is RMB appreciation.

"Guangdong Yida textile Limited by Share Ltd finance department official told reporters.

The company is one of the largest manufacturers of cotton shirts in the world. Most of its raw materials are purchased domestically, and most of its products are exported. That is to say, most of the expenditure of the company is RMB, and most of its income is dollars. Under the backdrop of the appreciation of the RMB against the US dollar, the company has suffered a great cost pressure.

Initially, the impact of RMB appreciation on the company in 2007 exceeded US $10 million.

For the Guangdong Mei Group, which exported up to US $3 billion 120 million in 2007, the impact of RMB appreciation on enterprises is also enormous.

The group of the United States made an account of the reporters. According to the export sales of the US group, the factors such as raising the price, tapping the potential of the cost, raising funds in advance, and financial derivatives and other measures to reduce the losses were not considered. The average appreciation rate of the RMB was only estimated according to the average appreciation of the RMB during the payment period. In July 21, 2005, the RMB exchange rate reform increased by 2% on the day of the RMB exchange rate, while the US group lost 66 million yuan on that day, and the annual loss was about 80 million yuan.

In 2006, the estimated loss was 130 million yuan; in 2007, the estimated loss was 380 million yuan; in 2008, the estimated loss was 480 million yuan.

Although it is affected by the appreciation of RMB, the export of these two enterprises is still strong.

In 2007, the sales volume of Yida company increased by 20%, and the proportion of exports remained at about 80%; the exports of the US group in 2005, 2006 and 2007 were 1 billion 760 million US dollars, 2 billion 210 million US dollars and 3 billion 120 million US dollars respectively, with the growth rates of 65%, 25% and 41% respectively.

At the same time, the total profits of the two enterprises have not decreased. The total profit of Yida company in recent two years is basically stable, while the net profit of the US group is increasing every year.

However, for some export enterprises which are small in scale, extensive in operation, low in development level and poor in exchange rate risk management, they can not digest the impact brought by the appreciation of the RMB exchange rate.

In Huizhou, the shoe industry and the production base of the National Women's shoes, Jilong Town, there are 130 shoe factories registered in the city, accounting for less than 30% of the total number of shoe factories, most of which are small factories or workshops with less than 40 employees, and only 250 of the shoe factories in the town. Most small factories are mainly dependent on distributors for their production and sales. They can only take orders for production, have low pricing power, have weak financial strength, have no ability to independently develop products, have no independent brands, and have no independent sales network; and corporate profits depend entirely on cheap labor costs.

In 2007, due to rising costs and declining profits, the town shoe factory could receive a certain profit margin of about 40%, which could not bear the pressure of appreciation of the exchange rate. The number of shoe factories that were pferred and closed was about 300.

But overall, the appreciation of the renminbi has little impact on Guangdong.

According to the data of Guangdong Provincial Department of foreign trade and economic cooperation, the total import and export volume of Guangdong in 2007 was 634 billion 50 million US dollars, an increase of 20.2% over the same period, of which 369 billion 250 million US dollars in exports, an increase of 22.2% over the same period last year.

A follow up survey of sample enterprises in key industries shows that the export sales revenue of most industries has not been significantly affected. In addition to a slight decrease in the export sales income of the footwear industry and the ceramic industry, the export sales revenue of other industries has increased. During the survey period, except for the loss of textile industry, other industries have made profits, among which jewelry, footwear, steel, IT electronics industry has a relatively fast growth in export profits, and the profits in the toy and mobile phone industry have decreased significantly. The profits of other industries are basically flat, and the profitability is still good.

In response to the survey, reporters found that although the RMB exchange rate appreciated sharply, coupled with the continuous increase of raw materials and manpower costs and other unfavorable factors, a considerable number of enterprises' profits had not been significantly affected, especially in high-tech enterprises.

Taking Delta Electronics in Dongguan as an example, in the case of stable sales revenue, the profit in 2006 was 480 million yuan and increased to 600 million yuan in 2007.

"Because of crisis, there is a turning point, so we can find business opportunities.

"The responsible person of Delta Electronics of Dongguan explained the reason for its increase in profits.

Like Taida electronics, many enterprises in Guangdong are trying to digest various adverse factors including RMB appreciation through various ways.

Mei Guangdong group financial department told reporters that the United States Group avoided losses in RMB appreciation through various ways: strengthening cost control management, cooperating with the industrial chain to tap costs, reducing production costs, increasing research and development of new products and high-end products, increasing the added value of enterprise products, increasing the share of mainstream market, and effectively raising gross margin; increasing trade financing operations, recovering foreign exchange funds in advance, and making early settlement of foreign exchange.

In 2007, the US group operated a total of 312 million US dollars in trade financing, reducing the loss of RMB appreciation by about 16 million 700 thousand yuan. In addition, we chose multi currency settlement and took advantage of the recent weakening trend of the US dollar to convert some US dollar settlement into Euro settlement. In 2007, the RMB actually depreciated against the euro, which reduced the loss of RMB appreciation by about 11 million 220 thousand yuan.

At the same time, the United States group used financial derivatives to reduce the loss of RMB appreciation, mainly the operation of the long-term settlement of foreign exchange, in 2006, the operation of the long-term settlement of foreign exchange amounted to 270 million US dollars, reducing the appreciation of the RMB 11 million 290 thousand yuan loss, in 2007, the total operation of long-term settlement of foreign exchange 730 million U. S. dollars, is expected to reduce the RMB exchange rate derivatives in 2008, the loss of about 95 million yuan.

Guangdong Yida textile Limited by Share Ltd has done a lot in coping with the appreciation of the renminbi.

The company gradually converted all Renminbi loans into US dollar loans, shortened the collection period of overseas sales, promptly discounted the bills, and chose financial derivatives to lock in the risk of RMB appreciation.

In Foshan Jiayi Industrial Co., Ltd., because of taking risk prevention measures, they even benefited from the rapid appreciation of the RMB in January this year.

Not all enterprises can digest the impact of rising costs.

Some enterprises are under pressure to seek relocation.

Whether or not the relocation of enterprises is related to the appreciation of RMB? There are many reasons for the relocation of enterprises, but it is mainly due to the implementation of the new labor law, the increase of raw material prices and the reduction of the export tax rebate rate.

The internal investigation results from the office of the Guangdong Provincial Committee of the Provincial Committee showed that the collapse and relocation of enterprises in Guangdong were mainly labor intensive "three to one supplement" enterprises and three capital enterprises, and the number of foreign migrated enterprises and the proportion of industrial output value were not large, and there was no large-scale bankruptcy and relocation of enterprises.

A survey by local government shows that in 2006, 119 enterprises in Shenzhen had planned or moved out, involving industrial added value accounting for only 0.95% of the city's industrial added value.

Among them, the "three to one subsidy" and 69% foreign-funded enterprises accounted for more than 144; the 144 "world top 500" enterprises invested in Shenzhen did not move out.

In 2007, the "three to one subsidy" enterprises in Dongguan totaled 7414 registered enterprises, down only 9.61% from the same period last year, and 50 foreign-invested enterprises in Zhongshan, and 262 foreign-invested enterprises in the same period. The number of manufacturing enterprises that had been cancelled or moved out in Foshan was 650, with 1650 NEW businesses in the same period.

In addition, some enterprises in Jiangmen, Huizhou and other places indicated that they had already been faced with the choice of relocation, while Zhuhai, Zhaoqing and other places did not have relocation plans.

At present, the relocation of enterprises in Guangdong mainly includes adaptive relocation (i.e. the relocation of enterprises as a whole) and expansion of relocation (i.e., the headquarters of enterprises such as management, R & D, marketing, and financial centers are still in the locality, while part of the production capacity is moved out), and the expansion is mainly based on expansion.

Take Shenzhen as an example, in 2006, the adaptability of the enterprises in the city was 56, the total industrial output value accounted for 25% of the total output value of the relocation enterprises, and the expansion of 63 enterprises, the total industrial output value accounted for 75% of the total output value of the relocation enterprises.

We expect that RMB will appreciate by 8% or so in 2007, so many enterprises predict that RMB will appreciate more than 8% in 2008.

Liang Weihao, President of Dongguan Association of foreign investment enterprises, sighed, "the RMB appreciation is too fast. In the past two years, the RMB appreciation will exceed 20%. Imagine which company will have a profit of 20%?" for the view that the appreciation of the RMB exchange rate will be used as a monetary policy operation means this year, Guangdong export oriented enterprises should be cautious.

"If the RMB continues to appreciate in a short time, the negative impact on the company's efficiency will be very serious.

"Analysts at Yida company said.

The financial department of the United States believes that despite the many measures taken, the group still suffered heavy losses of appreciation in 2008.

Moreover, the financial situation in 2008 is more unfavorable for enterprises to avoid exchange rate risk: under the influence of the strict control of the scale of bank foreign debts, the credit compression of commercial banks, the reduction of foreign currency lending scale, and the increase of the cost of trade financing of enterprises are often limited by the scale restrictions of banks. Enterprises are unable to meet the needs of enterprises in advance through trade financing, and timely settlement of foreign exchange in order to avoid the loss of RMB appreciation.

At the same time, the deterioration of European and American economies will reduce foreign demand and intensify competition, which will further affect the foreign trade environment of enterprises.

In the survey, many enterprises suggested that the state should speed up the construction of the financial market, and provide an effective channel for enterprises to avoid the risk of exchange rate fluctuations.

Faced with the risk of exchange rate fluctuations, many high quality enterprises have circumvent or reduce risks through dealing with forward selling and swaps, and so on. The management ability of enterprises to exchange rate risk is becoming more and more important for their development.

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