China : the three challenges of the exportation business

The repatriation of Indian orders to China mentioned in the last article should not hide the reality. The research bureau Trigger Trend recalls the three significant challenges facing exports, the rise of the yuan against the dollar, offshoring, and the structure of the Chinese economy too dependent on investment.

The rise of the yuan

With China’s economic recovery and the widening interest rate differential between the United States and China, the yuan against the U.S. dollar achieved its best quarterly performance in the past 12 years in the third quarter, with a high of 6.69 to the dollar, its highest level since April 2019.

renminbi and usd

After the national vacations, the foreign exchange markets began to bet on the possibility of a Biden victory, the yuan soared 1.4% in a single day, its largest one-day gain in 15 years. The central bank reacted by limiting risk measures-taking on futures contracts, to no avail.
Uncertainty over the short-term U.S. elections will also continue to fuel yuan’s volatility. The government wants to avoid the Japanese trap with the Plaza Agreement in 1985: a rapid appreciation of the yen against the dollar, which fueled the stock market bubble and the real estate bubble before it collapsed.
For Chinese exporters, the exchange rate hurt their profits. The more orders come in, the more fear there is of selling at a loss. The prices given when orders were placed did not include the exchange rate risk. Companies work on cycles of one to three months between order and payment on delivery.

Relocation

Indian textile orders in part have been repatriated to China, but this is not the underlying trend, as the cell phone manufacturing industry is looking outward, especially to India. To attract foreign investment, the Indian government this year launched a $6.6 billion incentive program and a major $1.4 trillion infrastructure plan to turn India into a new production center for smartphones.
In early August, Apple moved six production lines from China to India and has now “relocated” eight factories from China to India. In July, India’s Ministry of Communication Technology announced that the iPhone 11 went into production at the Foxconn factory in Chennai. Foxconn planned to invest $1 billion to expand the plant to provide one-fifth of the Chinese factory’s iPhone production capacity.
Reports from the Guangxi region indicate that nine hundred Chinese technicians were crossing the Vietnamese border to take up their posts. The employers are companies with Chinese and Taiwanese capital, such as the famous Foxconn. Besides, several hundred workers who entered the country illegally were sent back to China. These kinds of events do not appear in the official Chinese media for the moment!
The deterioration of relations between the United States and China has reinforced American and European companies’ concerns about their excessive dependence on Chinese supply chains. The epidemic has only temporarily disrupted the global industrial chain’s adjustment, which had already begun before the health crisis.

The difficult structural transformation of the Chinese economy

China announced its GDP results for the third quarter. The good news is that the Chinese economy has gone green, with a 4.9% growth in the third quarter and 0.7% in the first three quarters.
But a closer look at the three main components of GDP shows that the economy is still dependent on the past model. In the first three quarters, consumption lagged behind investment and exports. Investment in assets increased by 0.8 percent year-on-year: manufacturing industry declined by 6.5 percent, infrastructure grew by 0.2 percent, and real estate development by 5.6 percent.
Total imports and exports grew by 0.7 percent, exports by 1.8 percent, but imports slipped by 0.6 percent.
Retail sales of consumer goods declined by 7.2% year-over-year.
China’s economic dependence on the real estate did not decline. These are the realities that the “dual-cycle” strategy must face.

Economist Liu Yuhui compares China’s economy to an overloaded truck on a downhill slope that is trying to be braked – 中国经济是踩着刹车下坡的超载重卡. The risks and challenges are even more significant, and it is essential to shift to a reallocation of resources and get out of the real estate “kidnapping.” The structure of the economy has to change; otherwise, everyone will suffer, even exports.

Related articles :

From India to China

China or India?

To Vietnam

The rise of the renminbi

Sources :
印度天量订单转移到中国,国运迎来大转机?

24 October 2020

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