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 Introduction Why RMB revaluated Why RMB revaluated How China ’ s economy being affected How China ’ s economy being affected How does RMB appreciation affects Hong Kong How does RMB appreciation affects Hong Kong Conclusion Conclusion

3. Introduction China launched a reform of the RMB exchange rate system at 1994 China launched a reform of the RMB exchange rate system at 1994 Pegged to USD at 8.28 to 1 USD since 1995 Pegged to USD at 8.28 to 1 USD since 1995 Exchange rate was strictly controlled Exchange rate was strictly controlled Fluctuation rate negligible Fluctuation rate negligible

4. Exchange rate trend May 2002-May 2007

5. China ’ s trade surplus to EU, US China ’ s trade surplus to EU, US International Pressure International Pressure Unfair trade advantages Unfair trade advantages China's import and export with main trading partners in 2006 China's import and export with main trading partners in 2006 Why RMB revaluated

6. China ’ s import and export to US Total (in billion USD) Export Import Surplus 2006262.68203.4759.21144.26 2005211.631,62.9048.73114.17 2004169.62124.9544.6780.28 2003126.392.733.8658.84

7. International pressures Pressure form Japan and US Pressure form Japan and US US Secretary of Treasury US Secretary of Treasury John Snow, Henry Paulson urged that RMB needs a more flexible exchange rate” John Snow, Henry Paulson urged that RMB needs a more flexible exchange rate” “ Schumer-Graham ’ s Bill ”, propose tariffs on Chinese products. “ Schumer-Graham ’ s Bill ”, propose tariffs on Chinese products. Penalize Chinese for manipulate currency Penalize Chinese for manipulate currency John Snow Henry Paulson

8. Appreciation China agreed to gradually reform the exchange rate China agreed to gradually reform the exchange rate Revaluated at 8.11 to 1usd at 21,July, 2005 Revaluated at 8.11 to 1usd at 21,July, 2005 Allows the RMB to rise or fall 0.3 percent daily Allows the RMB to rise or fall 0.3 percent daily Pegged with a basket of foreign currency Pegged with a basket of foreign currency The basket is dominated by US dollar The basket is dominated by US dollar

9. Exchange rate trend May2005- May2007

10. appreciation RMB increased about 7% since 2005 RMB increased about 7% since 2005 We expected RMB will goes up progressively We expected RMB will goes up progressively

11. How appreciation affects China ’ s economy?

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

13. Textile industry China joined WTO China joined WTO Strong textile nation throughout the world Strong textile nation throughout the world Labor-orientation sections Labor-orientation sections Great influence on the export of garments Great influence on the export of garments In 2006: China export value: US$ 969.08 billion Textile industry: US$ 117.5 billion (12.1%) In 2006: China export value: US$ 969.08 billion Textile industry: US$ 117.5 billion (12.1%)

14. Impacts on textile company Different level of impacts on: Different level of impacts on: Large companies Large companies Small-and-medium sized 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 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, For small-and-medium sized companies, Great influence Lack of competitive power More likely to face bankruptcy  cause unemployment Great influence Lack of competitive power More likely to face bankruptcy  cause unemployment Workers in textile industries: from low/medium income families  trigger great social problems 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 Before RMB appreciation, China is a cheap labor nation RMB appreciation  increase labor cost RMB appreciation  increase labor cost Textile industry: labor intensive industry Textile industry: labor intensive industry So, total production cost greatly increased So, total production cost greatly increased Find out other alternatives … Find out other alternatives …

17. Alternatives … Other low cost labor nation Other low cost labor nation E.g. Bangladesh E.g. Bangladesh Salary: > US$0.07 /hour Salary: > US$0.07 /hour If US$1 : RMB ¥ 7.8. If US$1 : RMB ¥ 7.8. US$0.07 /hour = RMB ¥ 0.546 per hour US$0.07 /hour = RMB ¥ 0.546 per hour Cheap labor Cheap labor RMB appreciation  Lose competitive advantage RMB appreciation  Lose competitive advantage

18. Energy industry Rapid development Rapid development High demand on raw material e.g. fuel High demand on raw material e.g. fuel Not produce all herself Not produce all herself Rely on import Rely on import

19. Impact on energy industry Appreciation on RMB Appreciation on RMB Positive effect Positive effect Pay less for raw material Pay less for raw material Cost of production declines  Price of product decreases 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. 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. 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. Imported cost reduces 10%  save at least US$ 8.7 billion. RMB ¥ 7: US$1, US$ 8.7 billion = RMB ¥ 61 billion. RMB ¥ 7: US$1, US$ 8.7 billion = RMB ¥ 61 billion. Reduce the imported cost of raw material when RMB appreciates. Reduce the imported cost of raw material when RMB appreciates.

21. Example China Southern Airline China Southern Airline 30% capital spends on fuel 30% capital spends on fuel Huge loan overseas e.g. maintenance Huge loan overseas e.g. maintenance Every 1% appreciation  RMB ¥ 316 million income from exchange 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 Mainland is Hong Kong ’ s biggest source market Comprise half of the tourists in Hong Kong up to 8% of the economic activities Comprise half of the tourists in Hong Kong up to 8% of the economic activities ↑ RMB, ↑purchasing power of Mainland tourists ↑ RMB, ↑purchasing power of Mainland tourists Hong Kong is a cheaper place to travel Hong Kong is a cheaper place to travel When buying some luxury items, save quite a lot of money compared to recent years When buying some luxury items, save quite a lot of money compared to recent years

24. Individual Visit Scheme now covers 38 Mainland cities Individual Visit Scheme now covers 38 Mainland cities Government wants to extend the scheme to six other provincial cities Government wants to extend the scheme to six other provincial cities

26. Retail Industry Shopping is the main purpose of nearly 90% of visitors 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 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 Mainland tourists contribute to half of the total visitors, a large proportion of the sales value are spent by them

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

28. 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

29. Source: 2005 TFWA-ACNielsen Chinese Traveller Study

30. Manufacturing Industry 20 years ago: many Hong Kong manufacturing companies moved to Mainland China 20 years ago: many Hong Kong manufacturing companies moved 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 and efficiently Company can operate effectively and efficiently

31. The situation is totally different in these few years The situation is totally different in these few years Main reasons: Main reasons:  RMB appreciation  RMB appreciation  Crude oil price increases  Crude oil price increases

32. RMB appreciation Negative impacts on Hong Kong manufacturers in the Mainland who engage in labor intensive industry Negative impacts on Hong Kong manufacturers in the Mainland who engage in labor intensive industry Such as clothing, electronics, toys and shoes industry Such as clothing, electronics, toys and shoes industry Operating cost include labor cost, rent, electricity, etc are all paid in RMB Operating cost include labor cost, rent, electricity, etc are all paid in RMB RMB appreciation  higher operating cost RMB appreciation  higher operating cost  lower profit  lower profit

33. Crude Oil Price Increases Year Price/ barrel Year Price/ barrel 2004 US$25 2004 US$25 2006 US$70 2006 US$70 ABOUT 3 TIMES ABOUT 3 TIMES

34. Source: WTRG Economics

35. Example: Milo ’ s Knitwear, a textile industry Example: Milo ’ s Knitwear, a textile industry A Hong Kong manufacturing company with Mainland operations A Hong Kong manufacturing company with Mainland operations incomes are in US dollars, Euro and other foreign currencies incomes are in US dollars, Euro and other foreign currencies expenditure are in RMB expenditure are in RMB RMB appreciation results in higher costs RMB appreciation results in higher costs forced to increase the price of their products forced to increase the price of their products

36. Catering Industry RMB appreciation brings both advantages and disadvantages to catering industry RMB appreciation brings both advantages and disadvantages to catering industry For disadvantages: most of their layouts imports from Mainland most of their layouts imports from Mainland increases their operating cost a lot increases their operating cost a lot

37. Example: McDonald ’ s Example: McDonald ’ s majority of foods supply from mainland majority of foods supply from mainland operating costs increases together with higher rent, electricity fee, food supply from mainland, etc operating costs increases together with higher rent, electricity fee, food supply from mainland, etc

38. RMB appreciation also benefits to catering industry 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

39. stayed overnight mainland tourists used about $3829 per people in average stayed overnight mainland tourists used about $3829 per people in average about $519 on meals outside hotel about $519 on meals outside hotel Suppose RMB appreciates about 3% in 2007 Suppose RMB appreciates about 3% in 2007 stayed overnight mainland tourists will spend about $534 on meals outside hotel stayed overnight mainland tourists will spend about $534 on meals outside hotel catering industry will benefit a lot when RMB continues to appreciate catering industry will benefit a lot when RMB continues to appreciate

40. Conclusion Main reason for RMB appreciation:  International pressure Main reason for RMB appreciation:  International pressure Both positive & negative impacts occur Both positive & negative impacts occur For China Textile industry  -ve impact Energy industry  +ve impact For China Textile industry  -ve impact Energy industry  +ve impact For HK, Tourism industry  +ve impact For HK, Tourism industry  +ve impact Retail industry  +ve impact Retail industry  +ve impact Manufacturers in China  -ve impacts Manufacturers in China  -ve impacts Catering industry  +ve/-ve impacts Catering industry  +ve/-ve impacts