China's textile industry will start to lose money if the yuan continues to appreciate, according to a report by the National Development and Reform Commission (NDRC).

 

"With their average profit margin currently at 3 percent, textile companies will no longer be able to absorb the cost of the rising yuan," said the report.

 

The warning follows market forecasts that the yuan would appreciate by three percent against the US dollar to 7.72 over the next 12 months.

 

Last week, the yuan gained 135 base points against the US dollar in three successive days to hit 7.9540. On Monday, the exchange rate of the yuan against the dollar stood at 7.9499, up nearly four percent on last July.

 

Top economist Sun-Bae Kim, of Goldman Sachs on the Asian Economy, made an even bolder prediction, saying that the value of the yuan against the dollar would increase by six percent in 12 months.

 

Chinese textile manufacturers have been marking down their prices this year to sustain their exports and offset the negative impact of the rising yuan this year, said the report. "If the appreciation continues, the profit margin will be eaten up within a year."

 

Citing statistics from the Guotai Junan Securities Research Institute, the commission stressed that a one-percent appreciation in the yuan would lead to a loss of two percent in profit margins. In sectors with heavy dependence on exports such as cotton, wool and fabric for home use, the decline could be as much as six percent, it said.

 

As domestic textile exporters can only earn an average of US$0.3 from one shirt, the appreciation of the yuan has emphasized the need for textile manufacturers to sustain their competitiveness through technical innovation and intellectual property rights protection rather than through price cuts, said vice-president Li Lingmin of the China National Textiles Imports and Exports Corporation.

 

The growth rate of China's textile exports has slowed but its textile exports still rank the world's largest. From January to July, its textile exports reached US$27,051 million, up 18.7 percent on the previous year. The growth rate is 4.3 percent lower than the previous year and 3.1 percent lower than in January.

 

(Xinhua News Agency September 5, 2006)