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What are the effects that RMB appreciation bring?

What are the effects that RMB appreciation bring?. Group 4 Yau Lut Pong, Leo 053028 Lee Wing Hang, Joe 053066 Kan Wan Chung, Florence 053067 Chan Ka Ho, Ken 053134 Ho Kin Lun, Hugo 053141. Outline. Introduction Why RMB revaluated How China ’ s economy being affected

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What are the effects that RMB appreciation bring?

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  1. What are the effects that RMB appreciation bring? Group 4 Yau Lut Pong, Leo 053028 Lee Wing Hang, Joe 053066 Kan Wan Chung, Florence 053067 Chan Ka Ho, Ken 053134 Ho Kin Lun, Hugo 053141

  2. Outline • Introduction • Why RMB revaluated • How China’s economy being affected • How does RMB appreciation affects Hong Kong • Conclusion

  3. Introduction • China launched a reform of the RMB exchange rate system at 1994 • Pegged to USD at 8.28 to 1 USD since 1995 • Exchange rate was strictly controlled • Fluctuation rate negligible

  4. Exchange rate trendMay 2002-May 2007

  5. Why RMB revaluated • China’s trade surplus to EU, US • International Pressure • Unfair trade advantages China's import and export with main trading partners in 2006

  6. China’s import and export to US

  7. International pressures • Pressure form Japan and US • US Secretary of Treasury John Snow, Henry Paulson urged that RMB needs a more flexible exchange rate” • “ Schumer-Graham’s Bill” , propose tariffs on Chinese products. • Penalize Chinese for manipulate currency John Snow Henry Paulson

  8. Appreciation • China agreed to gradually reform the exchange rate • Revaluated at 8.11 to 1usd at 21,July, 2005 • Allows the RMB to rise or fall 0.3 percent daily • Pegged with a basket of foreign currency • The basket is dominated by US dollar

  9. Exchange rate trendMay2005- May2007

  10. appreciation • RMB increased about 7% since 2005 • We expected RMB will goes up progressively

  11. How appreciation affects China’s economy?

  12. How appreciation affects China’s economy? RMB & US dollar: fixed exchange ratio in the past RMB appreciation: lower amount of RMB to exchange US$1 Great impacts: import and export perspectives Focus: textile & energy industry.

  13. Textile industry • China joined WTO • Strong textile nation throughout the world • Labor-orientation sections • Great influence on the export of garments • In 2006:China export value: US$ 969.08 billionTextile industry:US$ 117.5 billion (12.1%)

  14. Impacts on textile company • Different level of impacts on: • Large companies • Small-and-medium sized companies • For large companies,Small extent of influence - High margins originally- Fixed proportion of the international market a smaller decrease in profits

  15. For small-and-medium sized companies, • Great influenceLack of competitive powerMore likely to face bankruptcy cause unemployment • Workers in textile industries:from low/medium income families trigger great social problems

  16. Foreign company may shift their factories to other countries after RMB appreciation … • Before RMB appreciation,China is a cheap labor nation • RMB appreciation increase labor cost • Textile industry: labor intensive industry • So, total production cost greatly increased • Find out other alternatives…

  17. Alternatives… • Other low cost labor nation • E.g. Bangladesh • Salary: > US$0.07 /hour • If US$1 : RMB¥7.8. • US$0.07 /hour = RMB¥0.546 per hour • Cheap labor • RMB appreciationLose competitive advantage

  18. Energy industry • Rapid development • High demand on raw material e.g. fuel • Not produce all herself • Rely on import

  19. Impact on energy industry • Appreciation on RMB • Positive effect • Pay less for raw material • Cost of production declines  Price of product decreases

  20. According to the Customs, in 2006, the amount of imported raw material was about US$ 87 billion. • If RMB (now RMB¥ 7.8: US$1) appreciates 10%, it can achieve to the level of RMB¥ 7: US$ 1. • Imported cost reduces 10%  save at least US$ 8.7 billion. • RMB¥ 7: US$1, US$ 8.7 billion = RMB¥ 61 billion. • Reduce the imported cost of raw material when RMB appreciates.

  21. Example • China Southern Airline • 30% capital spends on fuel • Huge loan overseas e.g. maintenance • Every 1% appreciation  RMB¥316 million income from exchange

  22. How does RMB appreciation affects different industry in Hong Kong?

  23. Tourism industry • Mainland is Hong Kong’s biggest source market • Comprise half of the tourists in Hong Kong up to 8% of the economic activities • ↑ RMB, ↑purchasing power of Mainland tourists • Hong Kong is a cheaper place to travel • When buying some luxury items, save quite a lot of money compared to recent years

  24. Individual Visit Scheme now covers 38 Mainland cities • Government wants to extend the scheme to six other provincial cities

  25. Retail Industry • Shopping is the main purpose of nearly 90% of visitors • Contribution of overnight visitors’ shopping spending to total retail sales value has increased from about 9.5% in 1998 to 17.8% in 2005 • Mainland tourists contribute to half of the total visitors, a large proportion of the sales value are spent by them

  26. The increasing purchasing power of Mainland tourists make them willing to spend more money on shopping • We expect RMB will revalue steadily in the future ,we can see that there will be a continue growth in retail industry in Hong Kong

  27. Per capita spending in 2005: $3,829 Source: Economic Analysis and Business Facilitation Unit, Financial Secretary's Office, Government of the Hong Kong Special Administrative Region

  28. Source: 2005 TFWA-ACNielsen Chinese Traveller Study

  29. Manufacturing Industry • 20 years ago: many Hong Kong manufacturing companies moved to Mainland China • Reasons: cheap labor and low rent • Decreases the operation cost • Company can operate effectively and efficiently

  30. The situation is totally different in these few years • Main reasons:  RMB appreciation  Crude oil price increases

  31. RMB appreciation • Negative impacts on Hong Kong manufacturers in the Mainland who engage in labor intensive industry • Such as clothing, electronics, toys and shoes industry • Operating cost include labor cost, rent, electricity, etc are all paid in RMB • RMB appreciation  higher operating cost  lower profit

  32. Crude Oil Price Increases Year Price/ barrel 2004 US$25 2006 US$70 ABOUT 3 TIMES

  33. Source: WTRG Economics

  34. Example: Milo’s Knitwear, a textile industry • A Hong Kong manufacturing company with Mainland operations • incomes are in US dollars, Euro and other foreign currencies • expenditure are in RMB • RMB appreciation results in higher costs • forced to increase the price of their products

  35. Catering Industry • RMB appreciation brings both advantages and disadvantages to catering industry For disadvantages: • most of their layouts imports from Mainland • increases their operating cost a lot

  36. Example: McDonald’s • majority of foods supply from mainland • operating costs increases together with higher rent, electricity fee, food supply from mainland, etc

  37. RMB appreciation also benefits to catering industry Source: Economic Analysis and Business Facilitation Unit, Financial Secretary's Office, Government of the Hong Kong Special Administrative Region

  38. stayed overnight mainland tourists used about $3829 per people in average • about $519 on meals outside hotel • Suppose RMB appreciates about 3% in 2007 • stayed overnight mainland tourists will spend about $534 on meals outside hotel • catering industry will benefit a lot when RMB continues to appreciate

  39. Conclusion • Main reason for RMB appreciation:International pressure • Both positive & negative impacts occur • For ChinaTextile industry  -ve impactEnergy industry  +ve impact • For HK,Tourism industry  +ve impact Retail industry  +ve impact Manufacturers in China  -ve impacts Catering industry  +ve/-ve impacts

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