China exchange move may hit buyers

3 August 2005

04 August 2005 | Anusha Bradley

The cost of Chinese exports could rise by 30 per cent in the next five years, following a small but symbolic revaluation of the country's currency.

According to analysts, purchasers sourcing there face price rises of around 2 per cent in the immediate future.

Before last month's move, the Chinese currency, the renminbi (known within the country as the yuan), was pegged to the US dollar at a rate of 8.28. This kept the price of its exports low.

But the change means the currency is now "pegged" to a range of currencies that China has not yet disclosed.

And according to analysts, further revaluation is likely to occur at a slow and steady pace.

Kevin O'Marah, vice-president of AMR Research and an expert in low-cost country sourcing, told SM: "I think there will be relative price increases of 25-30 per cent over the next five years."

In the short term, said David Woo, head of foreign exchange strategy at Barclays Capital, real prices are likely to only increase by 1 and 2 per cent.

He said this is because a stronger renminbi means Chinese manufacturers will pay less for imported raw materials such as oil, which in turn cuts their production costs.

Even a 1 per cent price increase could have a huge effect on the annual spend of companies sourcing heavily from China if rises are passed on to them.

However, Boots, which spends £60 million a year on goods from China, said it is not making provision for any price increases.

Chris Lovatt, head of strategic sourcing, said if suppliers pushed up prices, Boots would demand they make savings through manufacturing efficiencies.

Although Woo predicted more revaluations could follow in the years to come, they were unlikely to make Chinese suppliers less attractive.

O'Marah said: "I don't think it will be enough to eliminate China for cost advantage sourcing."

And Mark Berrisford-Smith, senior economist at HSBC, agreed that any revaluation would not erode the country's financial advantage.

"Given the competitiveness of China, it could be a 200 per cent change and still not make a difference because the cost differential is so huge," he said.


SMaug2005

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