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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