What are the effects What are the effects that RMB appreciation that RMB appreciation

bring? bring?

Group 4Group 4Yau Lut Pong, Leo Yau Lut Pong, Leo 053020530288Lee Wing Hang, Joe Lee Wing Hang, Joe 053060530666Kan Wan Chung, Florence 05Kan Wan Chung, Florence 0530673067Chan Ka Ho, Ken Chan Ka Ho, Ken 053130531344Ho Kin Lun, Hugo Ho Kin Lun, Hugo 053140531411

Outline Outline

IntroductionIntroduction Why RMB revaluatedWhy RMB revaluated How China’s economy being affectedHow China’s economy being affected How does RMB appreciation affects How does RMB appreciation affects

Hong KongHong Kong ConclusionConclusion

IntroductionIntroduction

China launched a reform of the RMB China launched a reform of the RMB exchange rate system at 1994exchange rate system at 1994

Pegged to USD at 8.28 to 1 USD Pegged to USD at 8.28 to 1 USD since 1995since 1995

Exchange rate was strictly controlled Exchange rate was strictly controlled

Fluctuation rate negligibleFluctuation rate negligible

Exchange rate trendExchange rate trendMay 2002-May 2007May 2002-May 2007

China’s trade surplus to EU, USChina’s trade surplus to EU, US International PressureInternational Pressure Unfair trade advantages Unfair trade advantages

China's import and export with main trading China's import and export with main trading

partners in 2006partners in 2006

Why RMB revaluatedWhy RMB revaluated

China’s import and China’s import and export to USexport to USTotalTotal

(in billion USD)(in billion USD)ExportExport

(in billion USD)(in billion USD)ImportImport

(in billion USD)(in billion USD)SurplusSurplus

(in billion USD)(in billion USD)

20062006 262.68262.68 203.47203.47 59.2159.21 144.26144.26

20052005 211.63211.63 1,62.901,62.90 48.7348.73 114.17114.17

20042004 169.62169.62 124.95124.95 44.6744.67 80.2880.28

20032003 126.3126.3 92.792.7 33.8633.86 58.8458.84

International pressuresInternational pressures Pressure form Japan and US Pressure form Japan and US US Secretary of Treasury US Secretary of Treasury

John Snow, Henry Paulson John Snow, Henry Paulson urged that RMB needs a urged that RMB needs a more flexible exchange rate”more flexible exchange rate”

“ “ Schumer-Graham’s Bill” , Schumer-Graham’s Bill” , propose tariffs on Chinese propose tariffs on Chinese products.products.

Penalize Chinese for Penalize Chinese for manipulate currency manipulate currency

John Snow

Henry Paulson

AppreciationAppreciation China agreed to gradually reform the China agreed to gradually reform the

exchange rateexchange rate Revaluated at 8.11 to 1usd at 21,July, Revaluated at 8.11 to 1usd at 21,July,

20052005 Allows the RMB to rise or fall 0.3 percent Allows the RMB to rise or fall 0.3 percent

daily daily Pegged with a basket of foreign currencyPegged with a basket of foreign currency The basket is dominated by US dollarThe basket is dominated by US dollar

Exchange rate trendExchange rate trend May2005- May2007May2005- May2007

appreciationappreciation

RMB increased about 7% since 2005 RMB increased about 7% since 2005

We expected RMB will goes up progreWe expected RMB will goes up progressivelyssively

How appreciation How appreciation affects China’s affects China’s

economy? economy?

How appreciation affects How appreciation affects China’s economy? China’s economy?

RMB & US dollar: RMB & US dollar: fixed exchange ratio in the past fixed exchange ratio in the pastRMB appreciation:RMB appreciation: lower amount of RMB to exchange lower amount of RMB to exchange US$1US$1Great impacts:Great impacts: import and export perspectives import and export perspectives Focus: textile & energy industry. Focus: textile & energy industry.

Textile industry Textile industry

China joined WTO China joined WTO Strong textile nation throughout the Strong textile nation throughout the

world world Labor-orientation sectionsLabor-orientation sections Great influence on the export of garments Great influence on the export of garments In 2006:In 2006:

China export value: US$ 969.08 billionChina export value: US$ 969.08 billionTextile industry:Textile industry:US$ 117.5 billion (12.1%)US$ 117.5 billion (12.1%)

Impacts on textile Impacts on textile companycompany

Different level of impacts on:Different level of impacts on: Large companies Large companies Small-and-medium sized companiesSmall-and-medium sized companies

For large companies,For large companies,Small extent of influence Small extent of influence - High margins originally- High margins originally- Fixed proportion of the international - Fixed proportion of the international market market a smaller decrease in profits a smaller decrease in profits

For small-and-medium sized For small-and-medium sized companies,companies,

Great influenceGreat influenceLack of competitive powerLack of competitive powerMore likely to face bankruptcyMore likely to face bankruptcy cause unemployment cause unemployment

Workers in textile industries:Workers in textile industries:from low/medium income familiesfrom low/medium income families trigger great social problems trigger great social problems

Foreign company may shift Foreign company may shift their factories to other their factories to other countries after RMB countries after RMB appreciation …appreciation … Before RMB appreciation,Before RMB appreciation,

China is a cheap labor nationChina is a cheap labor nation RMB appreciationRMB appreciation increase labor cost increase labor cost Textile industry: labor intensive industryTextile industry: labor intensive industry So, total production cost greatly So, total production cost greatly

increasedincreased Find out other alternatives…Find out other alternatives…

Alternatives…Alternatives…

Other low cost labor nationOther low cost labor nation E.g. Bangladesh E.g. Bangladesh Salary: > US$0.07 /hourSalary: > US$0.07 /hour If US$1 : RMB¥7.8. If US$1 : RMB¥7.8. US$0.07 /hour = RMB¥0.546 per US$0.07 /hour = RMB¥0.546 per

hourhour Cheap labor Cheap labor RMB appreciationRMB appreciation

Lose competitive advantageLose competitive advantage

Energy industryEnergy industry

Rapid developmentRapid development High demand on raw material e.g. High demand on raw material e.g.

fuelfuel Not produce all herselfNot produce all herself Rely on importRely on import

Impact on energy Impact on energy industryindustry

Appreciation on RMBAppreciation on RMB Positive effectPositive effect Pay less for raw materialPay less for raw material Cost of production declines Cost of production declines Price Price

of product decreasesof product decreases

According to the Customs, in 2006, the According to the Customs, in 2006, the amount of imported raw material was amount of imported raw material was about US$ 87 billion. about US$ 87 billion.

If RMB (now RMB¥ 7.8: US$1) If RMB (now RMB¥ 7.8: US$1) appreciates 10%, it can achieve to the appreciates 10%, it can achieve to the level of RMB¥ 7: US$ 1. level of RMB¥ 7: US$ 1.

Imported cost reduces 10% Imported cost reduces 10% save at save at least US$ 8.7 billion. least US$ 8.7 billion.

RMB¥ 7: US$1, US$ 8.7 billion = RMB¥ RMB¥ 7: US$1, US$ 8.7 billion = RMB¥ 61 billion. 61 billion.

Reduce the imported cost of raw material Reduce the imported cost of raw material when RMB appreciates.when RMB appreciates.

ExampleExample

China Southern AirlineChina Southern Airline 30% capital spends on fuel30% capital spends on fuel Huge loan overseas e.g. Huge loan overseas e.g.

maintenancemaintenance Every 1% appreciation Every 1% appreciation RMB¥ 316 RMB¥ 316

million income from exchangemillion income from exchange

How does RMB How does RMB appreciation affects appreciation affects different industry in different industry in

Hong Kong?Hong Kong?

Tourism industryTourism industry

Mainland is Hong Kong’s biggest source Mainland is Hong Kong’s biggest source market market

Comprise half of the tourists in Hong Kong Comprise half of the tourists in Hong Kong up to 8% of the economic activitiesup to 8% of the economic activities

↑↑ RMB, RMB, ↑↑purchasing power of Mainland purchasing power of Mainland touriststourists

Hong Kong is a cheaper place to travelHong Kong is a cheaper place to travel When buying some luxury items, save When buying some luxury items, save

quite a lot of money compared to recent quite a lot of money compared to recent years years

Individual Visit Scheme now covers Individual Visit Scheme now covers 38 Mainland cities38 Mainland cities

Government wants to extend the Government wants to extend the scheme to six other provincial citiesscheme to six other provincial cities

Retail Industry Retail Industry Shopping is the main purpose of nearly Shopping is the main purpose of nearly

90% of visitors 90% of visitors Contribution of overnight visitors’ Contribution of overnight visitors’

shopping spending to total retail sales shopping spending to total retail sales value has increased from about 9.5% in value has increased from about 9.5% in 1998 to 17.8% in 20051998 to 17.8% in 2005

Mainland tourists contribute to half of the Mainland tourists contribute to half of the total visitors, a large proportion of the total visitors, a large proportion of the sales value are spent by themsales value are spent by them

The increasing purchasing power of The increasing purchasing power of Mainland tourists make them willing to Mainland tourists make them willing to spend more money on shoppingspend more money on shopping

We expect RMB will revalue steadily in We expect RMB will revalue steadily in the future ,we can see that there will be a the future ,we can see that there will be a continue growth in retail industry in Hong continue growth in retail industry in Hong KongKong

Per capita spending in 2005: $3,829Per capita spending in 2005: $3,829

Spending pattern of overnight IVS

Shopping$2,61268.20%

Misc. (e.g. localtour,domestic

transport) $3258.50%

Hotel bills $3739.70%Meals outside

hotel $51913.60%

Source: Economic Analysis and Business Facilitation Unit, Financial Secretary's Office, Government of the Hong Kong Special Administrative Region

What mainland visitors purchase

53%

50%

50%

39%

29%

28%

27%

26%

18%

18%

10%

5%

3%

0% 10% 20% 30% 40% 50% 60%

Fashion

Cosmetics

Confectionery

Jewellery & Watches

Souvenirs

Telecom & Entertaunment

Leathergoods

Tabocco

Fragrance

Gourmet Food

Wine & Spirits

Fine Gift

Appliances

Source: 2005 TFWA-ACNielsen Chinese Traveller Study

Manufacturing IndustryManufacturing Industry

20 years ago: many Hong Kong 20 years ago: many Hong Kong manufacturing companies moved manufacturing companies moved to Mainland China to Mainland China

Reasons: cheap labor and low rent Reasons: cheap labor and low rent Decreases the operation cost Decreases the operation cost Company can operate effectively Company can operate effectively

and efficiently and efficiently

The situation is totally different in The situation is totally different in these few yearsthese few years

Main reasons:Main reasons:

RMB appreciation RMB appreciation

Crude oil price increases Crude oil price increases

RMB appreciationRMB appreciation

Negative impacts on Hong Kong Negative impacts on Hong Kong manufacturers in the Mainland who manufacturers in the Mainland who engage in labor intensive industryengage in labor intensive industry

Such as clothing, electronics, toys and Such as clothing, electronics, toys and shoes industryshoes industry

Operating cost include labor cost, rent, Operating cost include labor cost, rent, electricity, etc are all paid in RMBelectricity, etc are all paid in RMB

RMB appreciation RMB appreciation higher operating higher operating costcost

lower profitlower profit

Crude Oil Price IncreasesCrude Oil Price Increases

Year Price/ barrelYear Price/ barrel

2004 US$252004 US$25

2006 US$70 2006 US$70

ABOUT 3 TIMESABOUT 3 TIMES

Source: WTRG Economics

Example: Milo’s Knitwear, a textile iExample: Milo’s Knitwear, a textile industry ndustry

A Hong Kong manufacturing companA Hong Kong manufacturing company with Mainland operations y with Mainland operations

incomes are in US dollars, Euro and oincomes are in US dollars, Euro and other foreign currencies ther foreign currencies

expenditure are in RMB expenditure are in RMB RMB appreciation results in higher coRMB appreciation results in higher co

sts sts forced to increase the price of their prforced to increase the price of their pr

oductsoducts

Catering Industry Catering Industry

RMB appreciation brings both RMB appreciation brings both advantages and disadvantages to advantages and disadvantages to catering industrycatering industry

For disadvantages:For disadvantages: most of their layouts imports from most of their layouts imports from

Mainland Mainland increases their operating cost a lot increases their operating cost a lot

Example: McDonald’s Example: McDonald’s majority of foods supply from majority of foods supply from

mainlandmainland operating costs increases together operating costs increases together

with higher rent, electricity fee, with higher rent, electricity fee, food supply from mainland, etcfood supply from mainland, etc

RMB appreciation also benefits to RMB appreciation also benefits to catering industrycatering industry

Spending pattern of overnight IVS

Shopping$2,61268.20%

Misc. (e.g. localtour,domestic

transport) $3258.50%

Hotel bills $3739.70%Meals outside

hotel $51913.60%

Source: Economic Analysis and Business Facilitation Unit, Financial Secretary's Office, Government of the Hong Kong Special Administrative Region

stayed overnight mainland tourists stayed overnight mainland tourists used about $3829 per people in used about $3829 per people in average average

about $519 on meals outside hotel about $519 on meals outside hotel Suppose RMB appreciates about Suppose RMB appreciates about

3% in 2007 3% in 2007 stayed overnight mainland tourists stayed overnight mainland tourists

will spend about $534 on meals will spend about $534 on meals outside hoteloutside hotel

catering industry will benefit a lot catering industry will benefit a lot when RMB continues to appreciate when RMB continues to appreciate

ConclusionConclusion Main reason for RMB appreciation:Main reason for RMB appreciation:

International pressureInternational pressure Both positive & negative impacts occurBoth positive & negative impacts occur For ChinaFor China

Textile industry Textile industry -ve impact -ve impactEnergy industry Energy industry +ve impact +ve impact

For HK,For HK,Tourism industry Tourism industry +ve impact +ve impact Retail industry Retail industry +ve impact +ve impact Manufacturers in China Manufacturers in China -ve impacts -ve impacts Catering industry Catering industry +ve/-ve impacts +ve/-ve impacts