A rise in the yuan would be a disaster for labour-intensive Chinese exporters, a semi-official trade group said today, as frictions grow with the US and other Western powers over Beijing's stable currency policy.
The China Council for the Promotion of International Trade was checking with more than 1,000 exporters in 12 industries on whether they could cope with a stronger exchange rate, Zhang Wei, vice-chairman of the association, said.
Exporters in labour-intensive sectors such as garments and furniture worked on margins as small as 3 per cent, he said.
"If the yuan rises, these companies will face the immediate risk of going bust as their profit margin is already very narrow," Mr Zhang told a news conference. "So for these companies, the consequences would be disastrous."
China is under growing pressure from Washington to let the yuan appreciate. US lawmakers are threatening to slap duties on Chinese goods unless Beijing abandons its effective peg of 6.83 yuan per dollar instituted in mid-2008 to help its exporters ride out the global financial crisis.
While external pressure on China to push up the yuan is intense, domestic pressure to hold the currency down is even greater, said Mr Zhang, whose members include the country's biggest exporters.
China's shipbuilders alone had $150 billion of orders on hand, so a stronger yuan would result in immediate losses, he said. Only a minority of Chinese firms hedge exchange rate risk.
Exporters of telecommunications equipment and mechanical products would also be particularly vulnerable, he said.
Several branches of government, including the ministries of commerce and industry, conducted similar currency stress tests last month.
A government source familiar with one of the missions to China's coastal exporting hubs said it came back unconvinced that the advantages of a stronger yuan would outweigh the drawbacks because of the razor-thin margins that Mr Zhang mentioned.
"But having said that, we found that these companies are quite flexible in adapting to new market conditions," he said.
Because they can make a steady profit on their current margins, thanks to high volumes, they have little incentive to move up the value chain, the source added.
"So yuan appreciation would be a nice catalyst to force these firms to change for the better, which is also what the government wants to see," he said.
"It's true that jobs are a major concern. But we're also seeing labour shortages in many places. So I think it should be manageable."
The source familiar with the stress tests, speaking in a personal capacity, said arm-twisting by US lawmakers was counter-productive.
"The last thing China will do is be seen bowing to foreign pressure, even if it's the right thing to do. The Americans should keep quiet and not lecture the Chinese. Once it's left alone, China is quite likely to move on the yuan," he said.
Chinese premier Wen Jiabao denied on Sunday that the yuan is undervalued and criticised Washington for politicising the issue
The Ministry of Finance might also send research teams to Guangdong, Zhejiang and Shanghai later this month to test companies' ability to withstand an appreciation of the yuan, the 21st Century Business Herald reported today.
Mr Zhang said that Chinese exporters, anticipating a stronger exchange rate, had been improving their product ranges and switching their attention from the United States and Europe to Africa, Latin American and the Middle East.
That had helped many exporters to cope with the cumulative 21 per cent rise in the yuan against the dollar between July 2005 and July 2008.
But firms needed more time to adjust further, Mr Zhang said.
Reuters