the impact of RMB appreciation on Xiamen's export

The Impact of RMB Appreciationon Export-oriented Economy in Xiamen[Abstract]Margins have been constantly narrowed down as RMB appreciates over the last few years, which is especially true for some Xiamen export-oriented enterprises. Yuan’s rising poses both opportunities and challenges to exporters for it not only optimizes existing export structure, improves enterprises efficiency, but also deprives exporter’s price edge. Facing with the greatest challenge ever, it is a must for exporters to cope with stronger Yuan by further optimizing existing export structure, developing domestic market and adopting flexible financial instruments.[Key words] RMB Appreciation, Xiamen export-oriented enterprises, countermeasures人民币的升值对厦门出口行业的影响[摘要]近几年来，伴随着人民币的升值，厦门出口型企业的利润空间不断下降。

人民币升值给出口商带来的不仅是机遇，还有挑战。

因为人民币升值不仅优化当前的出口结构，提高出口企业的效率，也使出口商不再有价格优势。

所以在人名币日益升值的背景下，出口者必须进一步优化当前出口结构，积极开拓国内市场，同时，采用灵活的金融工具避险。

[关键词] 人民币升值厦门出口企业应对措施Contents Introduction (1)1. Features of Xiamen Export-oriented Enterprises (2)1.1 Export-oriented Economy (2)1.2 A dependence on Foreign-owned Enterprises (3)1.3 High Proportion in Processing Trade (4)1.4 Improper Matrix of Exported Products (5)2. RMB Appreciation and Its Effect on Xiamen Export (5)2.1 Developing Trend of RMB Exchange Rate (6)2.2 Factors to RMB Appreciation (6)2.3 The Effect of RMB Appreciation on Export (7)3. Impacts of RMB Appreciation on Xiamen Export-oriented Enterprises (8)3.1 Opportunities to Xiamen's Export-oriented Enterprises (8)3.2 Challenges to Xiamen's Export Enterprises (9)4. Countermeasures after RMB Appreciation4.1 Countermeasures for Xiamen Export Enterprises (11)4.2Countermeasures for Xiamen Governments (12)Conclusion (13)Works cited (15)Acknowledgement (16)IntroductionLocated in the southeastern coastal areas, Xiamen is one of the initial port cities opening to the foreign countries. Export should be particularly mentioned for its powerful engine in driving fast economic development in Xiamen. However, the effect of RMB appreciation on export is particularly conspicuous in recent years since it poses a tough test for export-oriented enterprises. However, the economy of Xiamen, which is highly dependent on export, has been closely bound with the performance of export especially after reform and opening-up, which means that Yuan's rising have a obvious impact on export-led company in Xiamen. Although current dilemma is not only the direct result of stronger Yuan, also the side-effect of economic downturn in America, debt crisis in Europe, and the global financial crisis, it is undeniable that all these factors drive RMB appreciate over the last decade. Therefore, the main purpose of writing this paper is to explore the impact of RMB appreciation on Xiamen's export-driven enterprises so as to give corresponding countermeasures in response to future RMB appreciation. As the old saying goes every coin has both sides, so does Yuan's rising. So it is not advisable to see the appreciation from the negative side only. What is the effect of RMB appreciation on Xiamen's export? What factors result in Yuan’s rising? And how to avoid the risks posed by the exchange rate? These questions are essential to this paper.Economists have been studying the effect of the currency rate fluctuation on regional economy for long time. And many profound theories have been achieved. Such as Thom-Asman, one of the well-known economists in sixteenth century, stated that the trade of balance is affected by the floating exchange rate. It was not until 1930s that economist Abba Ptachya Lerner conducted an in-depth study on the effect of currency devaluation on the trade balance. Of course, in China there are and were a great number of economists studying on it, especially under the background of constant RMB appreciation. Economists from home and abroad provide theory base for this paper.1. Features of Xiamen Export-oriented EconomyChina’s economy is featured for its export-led, investment-led growth model. According to World Bank data, since 2009 exports by China have been constantly rising to 31% of its GDP in 2011. Highly rely on exports has hit the country’s economy hard in previous years as its growth was dragged down by Yuan’s rising since 2005. It is especially true for Xiamen as one of the export-based city which is one of the five earliest Special Economic Zones in China. Why is Xiamen export-based economy so susceptible to the fluctuation of RMB? To answer this question, special attention must go to the present situation of Xiamen export-led enterprises.1.1 Export-oriented EconomyXiamen's GDP growth in recent decades has been impressive. However, Xiamen's growth trajectory poses a higher and growing dependence on exports to maintain economic growth (Lu Shengrong 25). Export dependence refers to the share of export volume in GDP. The ratio reflects the degree of dependence on export. Evidence can be found from the figures released by Xiamen Statistical Bureau. (Chart 1: the degree of Xiamen's export dependence, 2000-2010)Xiamen's export dependence keeps growing until 2005 reaching its peak of 140.5%. The following four years witnessed a remarkable decline in 2008 and 2009because of world economic recession, and followed by a recovery to 106.1% in 2010. Although the percentage fell down, it never fell below 100%. In 2011, the total amount of GDP in Xiamen is 253.58 billion U.S. dollars, and around 45% is achieved by foreign trade. So it is undeniable that Xiamen is an export-oriented city since the effort made by exporters cannot be ignored for they contribute greatly in developing local economy.1.2 A Dependence on Foreign-owned EnterprisesAccording to the traditional division of enterprises, Xiamen's export-based enterprises can be mainly divided into three categories, which are state-owned, foreign-owned, and private-owned enterprises (SOEs, FOEs, POEs). Last decades witnessed the fast export growth of FOEs and their increasing weight in total trade volume (Jiang Xiaojun and Wang Jun 59). (Chart3: Export Value Made by SOEs, POEs, FOEs, 2010), and the pie chart describes the proportion of each catalogue in 2010.(Chart 4: Export share of SOEs, POEs, FOEs, 2010)Data above shows over half of export-based companies are foreign-owned, and this is a fatal weakness. Because most of FOEs are engaging in the processing trade,making fine profits by engaging in certain processing line of international cooperation. Not all but most of FOEs take advantage of Xiamen's competitive labor cost to develop their processing trade. So to certain extent FOEs have relatively smaller contribution to regional economic development. Unlike FOEs, POEs is the most flexible sector to regional economy. POEs' fast growth and development is one of major driving forces in Xiamen's economy. Compared with Zhejiang whose privately-run enterprises account for about 70 percent, Xiamen still have a long way to foster its private enterprises with only 40 percent.1.3 High Proportion in Processing TradeAccording to China's regulation on foreign trade administration, export was classified into general trade and processing trade. Processing trade is defined as a country who utilizes domestic manufacturing capabilities and technologies to process imported raw materials, materials, or hardware parts into manufactured products for exports, so as to create added values (Jiang Xiaojun and Wang Jun 59). Those engaging in processing trade are mainly foreign-funded enterprises focusing on labor-incentive industries (Lu Shengrong, 30). Hence it is hard to bound with regional economy.General trade is the main focus of Xiamen, supplemented by processing trade (Zhang Yingwei, 66). Last decade saw gradual decrease in processing trade, but it remained as high as 38.4 percent in 2010 (chart5: Proportion of ordinary and processing trade in Xiamen, 2000-2010).T here are a large number of exporters making profit from processing trade inXiamen. In 2010, 36.6% of export with an amount of 12.94 billion was achieved by processing trade. Most of processing trade exporters take advantage of labor force to produce low value-added products with little technology. Such trading mode is more vulnerable to foreign exchange rate fluctuation.1.4 Improper Matrix of Exported ProductsExcept mechanical and electrical products, Xiamen’s main competitiveness comes from labor-incentive and less value-added industries, such as garment, light textile, shoes (Lu Shengrong, 78) ( Pie Chart 6: Matrix of Xiamen's Exported Products,2010)Though the majority of exported products are mechanical and electrical products, labor-intensive products still accounts for a large proportion, such as shoes, hat, umbrella, textile, etc. Those low-end products are easily affected by RMB fluctuation, so the matrix is urgently needed to be optimized.2. RMB Appreciation and Its Impact on ExportAs the RMB against the U.S. dollar soared to its peak since China has adopted a package of monetary policy, RMB appreciation has become a hot issue around the world. In the beginning of the 2012, the Yuan was weak against the U.S. dollar, however, since late July, market orientation reversed with the worsening of the European sovereign debt crisis. The exchange rate subsequently hit the levels of 6.28, 6.27, 6.26, and 6.23 from mid October onward. There are many reasons relating to RMB appreciation. Booming domestic market, the complex and volatile international environment have complicated the issue. Meanwhile, the appreciation of the RMB hasa huge impact on Export. First of all, it is necessary to review developing process of the RMB appreciation.2.1 Developing Trend of RMB Exchange Rate.China has begun to implement floating exchange rate system based on market supply and demand, with reference to a basket of currencies since July, 2005. At the end of 2005, the exchange rate of RMB against the U.S. Dollar exceeded 8:1 boundary, Refreshed 7:1 in 2008. China’s foreign exchange regime was under intense pressure again in the first half year of 2010 since RMB was re-pegged to the dollar as the financial crisis intensified in 2008.( see Chart 1: Value of the Yuan against U.S. Dollar, 2000 - 2011).Despite the fine and appropriate adjustments that Chinese government continuously made to respond positively to stabilize the RMB exchange rate, ensure economic stability and development. Pressure from international economy gloomy remain intensify Yuan’s appreciation. Looking into future, RMB internationalization is possibly to China, so the expectation may be slow but won’t stall right now.2.2 Factors of RMB AppreciationThe reasons for Yuan’s rising not just related to trade relations with foreign countries especially Sino-US subtle relationship, but also profoundly influenced by the country’s macroeconomic environment.Firstly, considerable attention should be paid to internal pressure caused byincreasing productivity. China’s rapid economic growth is marked by stable GDP growth during last decade. It not only dramatically enhanced China's overall national strength, but also brings the appreciation pressure against the other country's currencies. Besides, China has the world’s largest foreign exchange reserve with the amount of US 3.2 trillion dollars. Huge amount of foreign exchange reserve requires government to issue equal amount of RMB to circulate in the market. Constant trade surplus in the past successive years inevitably intensified Yuan’s rising.Secondly, external factors cannot be ignored. Under the international market, it is safe to say that RMB was undervalued. So the pressure from the international society led by the USA and Japan forces RMB to appreciate. In addition, the two largest markets of China’s exporting destinations, the US and the EU, owing to sluggish economies, have seen a lower consumption level, which inevitably impose a great impact on Chinese exports (Li Rui, 42).2.3 The Effect of RMB Appreciation on ExportChina's foreign trade went into fast development since 1978. At present, China is perceived as the largest export country sharing an important amount of world's total trade volume. In theory, consider the demand for certain product in domestic market, the quantity demanded falls as the prices rises. The same applies to global market, a competitive market in which there are many buyers and many sellers (Mankiw 62). Goods exported from China lost its competitiveness in price as Yuan appreciate over other foreign currencies. Because exporters have to hold their overseas prices level by raising their sterling export prices and in consequence upset their customers (E.Branch 153). But price is not the only part of consideration when dealing with foreign trade. Evidence from previous years, those enterprises with their competitive edge in low value added commodities are more likely to be affected by currency fluctuation. Company suffers most from stronger Yuan are textile and apparel exporters, such as garment industry, as estimated that it sees a decline of around 1% in profit if Yuan gains 5% against Dollar. However, for high-value added goods, the effect is much miner than those in textile, shoes exporters. In spite of less competitiveness in prices, Yuan’s rising poses negative effect on exporters bydiscouraging firms from absorbing investment, undertaking innovation and trade. An inevitable trend is to shift resource to trade in service or other high value content goods. Therefore, as RMB appreciates it also impose exporter the need for adjustment no matter the investment orientation or exported goods structure. In the long run, export market can see a health development from proper appreciation.3. Impacts of RMB Appreciation on Xiamen Export-oriented EnterprisesExport-led economy in China is bound to be influenced by foreign exchange rate fluctuation especially for an outward city, so foreign trade in Xiamen has been and will be influenced by Yuan's rising. However, empirical evidence shows that RMB appreciation brings both challenges and opportunities to export-led enterprises in Xiamen. Some enterprises suffer from the impact of a stronger Yuan, but some stand out despite the hard financial environment by optimizing structures and improving product lines.3.1 Opportunities to Xiamen's Export-oriented Enterprises3.1.1 Optimizing the Xiamen's Existing Enterprises Export StructureYuan's rising enhances exporters’ independent innovation. At present, resources and labor-intensive, low value-added products have a great part in Xiamen's export products while service and technology-intensive and high-tech products are relatively underdeveloped. Not surprisingly, for those enterprises, Yuan's rising would weaken regional labor cost advantage, lower profit margins and form a negative effect on export. It urges Xiamen's Enterprises to hedge against exchange rate risks through cost efficiencies, product structure optimization, and technological innovation.Although those products with low value-added, price-sensitive commodities (especially in light textiles, stone products, garment, shoes) suffer great loss when confronting a harder Yuan, which even forces them remove from international market, it does little harm to those high value-added products like high value-added mechanical and electrical products. Therefore, investors are encouraged to invest intertiary industry especially service and high-tech products. Take 2010 for example, 80.8 percent of fixed assets was utilized in tertiary industry, only around 40 percent before 2008 (Lu Shengrong, 35). From this point of view, Yuan's rising enhances capital utilization, stimulates growth in the production and export of the service-oriented, high-value-added goods, and encourages export enterprises to rely more on technological products, rather than low-price dominant market.3.1.2 Improving Export Enterprises EfficiencyYuan's rising enforces exporters to self-improve their corporation system. When RMB appreciates against dollar, foreign consumers have to pay a higher cost to buy products imported from Xiamen, and price is no longer the competitive edge to attract those price-sensitive foreign importers. However, price is critical part of consideration in international trade. To safeguard the profit margins exporters know there is not much they can do about the exchanging rate, but they can adapt to the changing environment. Some of those enterprises keep eyes on self-improvement by improving both administrational and operational efficiency to tower above majority of like product.3.1.3 Facilitating Enterprises Investment in Service IndustryTo unfold it further, Yuan's rising enhances investment in service industry in Xiamen (Lu Shengrong 36). Competitive edge in Service industry is becoming one of the leading strengths for the corporation at home and abroad. The experience from Hongkong, a model city of export-oriented economy, shows a pattern of transforming from processing trade to service-based trade. Drawing lessons from the pattern of Hongkong, Xiamen gets huge potential to cast itself to be an outsourcing service provider.3.2 Challenges to Xiamen's Export Enterprises3.2.1 Adverse Effect on Manufactured GoodsRMB appreciation damage, to a certain extent, Xiamen's export competitiveness, Economic Observer reported on August 23, 2007 that if costs and RMB appreciation keeps rising, China's export price advantage will be diminished, thus reducing China's export competitiveness. It is especially true for Xiamen, a export- based city. A moreexpensive Yuan inevitably deprives the strengths of some price-led export corporation in Xiamen. Since 2008, Yuan's rising force the closure of some of the toy and textile factories in Xiamen because these companies face the immediate risk of going bust as their profit margins was already every narrow. Companies suffer most from stronger Yuan are textile, apparel makers, office equipment producers, producers of low-cost, low-technology products, whose minuscule profit margins can be erased by even small shift in the currency (according to statistic reported in China Daily those companies see a decline of around 1 percent in profits if the Yuan gains 5 percent on the dollar). That means a sting for those exporters in Xiamen.3.2.2 Negative Impact on Employment RateUnited Press International reported (July 7, 2011) that a more expensive Yuan also push foreign manufacturers shift plants in other developing countries, which handicap economic growth, and deepen unemployment. Currently, largely dependent on export, Xiamen requires high export growth to sustain its GDP growth. A rising Yuan has made goods less attractive to foreign importers, which result in shifting investment to other developing countries especially those investors for FOEs in processing trade. Unemployment rate increases as a result of bankruptcy or layoffs. Increasing unemployment rate may ultimately have a bad effect on Xiamen's social security.3.2.3 Negative Psychological Effect on PurchasersExporters take provocative measures in responding to Yuan's rising, which includes adjusting the price according to exchange rate. So the price of exported products increases as RMB appreciates from time to time. Purchasers are sensitive to price change. According to Frontier of Economics in China, September 2011, RMB appreciation affects China and its competitors. The empirical results show that 1 % rising in Yuan against U.S. dollar will reduce China’s Exports of textiles & apparel to the U.S. by 2.63% and raise the India’s export of textiles & apparel to the U.S. by 2.71%. With a high dependence on export, Xiamen are experiencing price raising almost in every products. Higher price tag, however, instigates a negative psychological effect on trade partners who believe that their profit margins will beshrunk.4. Countermeasures after RMB AppreciationRMB appreciation is bond to have a negative effect on every export corporation in Xiamen. But the effect varied to different products, little to high-tech and high value-added products, while dramatic to labor-intensive, low value-attached and priced-based products. To achieve comprehensive, balanced, sustainable development in Xiamen's export trade, it is necessary to transform the orientation for Xiamen's export trade from competitive price, excessive pursue of quantity to quality improvement, efficient management and export structure optimization. Though it is still uncertain whether the rise in RMB exchange rate is positive or negative to export on a wide basis, the challenges posed by a stronger Yuan do require both municipal government and enterprises to response in a positive manner under the guidance of scientific development.4.1 Countermeasures for Xiamen Export Enterprises4.1.1 Upgrading the Structure of the Export CommoditiesExporters should give top priority to up-grade the structure of exported goods. Since RMB appreciation have little, even positive, impact on high-end products, enterprises should actively promote the adjustment and upgrading of export structure and boost the trade of high-tech products. Export enterprises, especially those engage in the processing-trade, ought to proactively introduce new technology, develop new products and continuously improve the value-added products, reduce and eliminate the export with low-end and low value added products (Lu Shengrong190-192). Meanwhile, special focus must go to improve the quality of the goods. Good quality or distinguishing features can also make Chinese brands become competitive in the international market in spite of Yuan's rising.4.1.2 Lessing Export DependenceXiamen's economy experienced enormous difficulties during international financial crises, constant Yuan's rising makes it even tougher for all exporters. Thedegree of dependence on the export of Xiamen has a dramatic fall from 140% in 2005 to around 109% in 2009. It suggests that the formation of Xiamen's long-term over-reliance on exports model is not sustainable (Lu Shengrong, 30). However, the dependence ratio for Xiamen has climbed to 116.1% in 2010, reflecting that more disproportionate role of export in the city's economy. High degree export dependent ratio means that Xiamen is more vulnerable to Yuan's rising.One way to get rid of negative effect from RMB appreciation is to reduce excessive dependence on exports. China is a large population country with 1.3 billion. There is a huge potential for exporters to introduce their product to domestic market. Hence, it is suggested that local government actively set up appropriate platforms (like China International Fair for Investment and Trade) to bond regional business together, which enables exporters to find domestic market.On the other hand, Enterprises should accelerate the regional cooperation with neighboring area of west Taiwan Strait (Lu Shengrong 200). In recent years, accompanied by RMB appreciation, rising labor cost, slowdown in foreign economy, Xiamen's export-based economy is easily shocked by the fluctuation of external demand. Xiamen can reduce dependent on export and expand the scale of the market by accessing into the great market of the west region of the strait.4.1.3 Adopting Flexible and Effective Financial InstrumentsFaced with the steadily rising of Yuan, enterprises have to take effective steps to eliminate the negative effect. There are several financial instruments commonly used in international market to hedge against risk. The exchange rate can be avoided in the forward exchange market by buying the currency forward (E. Branch 155). Attention can also be paid to foreign future options, swap, and international guarantee when deciding settlement for export.4.2 Countermeasures for Xiamen Governments4.2.1 Encouraging POEs’ InvolvementDespite their important contribution to the nation's prosperity and wealth, POEs are in a comparatively disadvantaged position. Foreign funded ventures enjoy favorable tax-free status to some extent. And SOEs are supported by the governmentby receiving enormous assistance from the central government, but POEs rely solely on the local government to access to credit capital and social networks, and to receive subsidies as well as political protection. Compared with SOEs, POEs are relying on their own performance to survive and grow in the market (Lin Churu 41-44). Currently, there are only around 40 percent private-owned enterprises of all the export corporations in Xiamen. Comparing with other coastal and developed cities such as Shenzhen, Ningbo, Wenzhou and so no, the ratio is far from enough. Therefore, it is advisable for the government continue to give priority to develop private sectors. It has been proved in the last decade that under a stronger RMB private-owned enterprises, though some of state-owned and foreign-funded enterprises had negative year-on-year increase, remains to keep a surprising increase.Government should make full use of the advantage of Xiamen special economic zone, with the expansion of the scale of outward economy, by accelerating reform in foreign trade mechanism to improve the structural composition of export enterprises, introducing multiform of corporations, especially private-owned enterprises to take part in export (Zhang Mingzhi and Ma Jing 45) .4.2.2 Facilitating the Rapid Development of Tertiary IndustryRMB appreciation crowds out those firms in the manufacturing sector with low added value, poor management and low efficiency. It is undeniable that global trend goes to tertiary industry. Therefore, local government should pay special attention to develop service-oriented, high-valued-added products (Zhang Mingzhi and Ma Jing 45). The successful transformation pattern achieved by Hongkong is a good model set for Xiamen by shifting our focus from trading tangible goods to financial and service products.4.2.3 Improving Early Warning and Coping MechanismThough Yuan's appreciation in 2012 is not as abrupt as previous years, the rising expectation is foreseeable in the coming future. Hence, municipal government should have an overview toward currency dynamics, improve early warning and coping mechanism, so as to get foreign trade companies well-informed of fresh information and organize exporters actively responding to Yuans’ rising.ConclusionWith the fast development of economy, RMB internationalization is highly possible as China enjoys good international prestige and improves its overall national strength. Therefore, no one can deny that on the road to prosperity and rejuvenation, RMB will continue to appreciate over a certain period. If exporters want to make profit from complex international finance market, it does require them to cope with potential appreciation in the coming years.As shown from above, export is backbone to Xiamen's economy. How to effectively deal with appreciation can be figured out easily in this paper. It will be conductive to exporters if both municipal government and exporters develop a strong sense of anti-appreciation awareness by proving possible support for exporters. Apart from the government, Enterprises should also make full use of opportunities to improve their own competitiveness by optimizing export structure and improving innovative capability. It must be mentioned that not all but some low value-added products are vulnerable to Yuan's rising. That is to say, undue emphasis cannot be placed only on the negative side. This tendency is quite evident among the exporters who always consider RMB appreciation have little positive side but narrowing or losing their profits. In fact, Yuan's rising helps enterprises to reexamine their ways of management and improve their efficiency.With reference to the analysis on the impact of RMB appreciation on Xiamen's export above, one of the great challenges should be clearly pointed out, that optimizing the export structure is the key answer to both government and enterprises. In order to put Xiamen's export into a healthy track, current discussion on the way out of RMB appreciation is far from satisfying. Instead, enterprises should integrate theory and practice, and create a unique coping mechanism.To sum up, it is still unsure that Yuan's rising do good or harm to export. But it is always right that both government and exporters uphold an awareness of exchange rate fluctuation and take active response.。