China’s exporters could face even more intense pressure from rivals in Asia if the renminbi continues to strengthen, according to one analyst.
While currencies in Asia such as the rupee, yen and rupiah have depreciated in recent months, the renminbi has remained steadfast and could further appreciate, reducing the competiveness of Chinese manufacturers, according to Viktor Schvets, an analyst with Macquarie Equities Research.
“Although trade is a double-edged sword and in the complex world of cross-border supply chains, depreciation of foreign currency can make your own economy more efficient and competitive, essentially by reducing wholesale and component prices,” he said.
Based on real effective exchange rates, the renminbi was undervalued in 2002 to 2009 but — depending on the perspective — has been either fairly valued or overvalued for at least the last two years. Schvets said if current trends continued, over the next two to three years China could end up with a seriously overvalued currency. This would erode competitiveness despite the major productivity gains made by many manufacturers in the face of rising labor costs.
“Considering China’s increasing export similarity with a number of key developed markets, and growing evidence of China becoming far more than just a last-mile assembler in a number of industries, this would increasingly place the country in the firing range of internally devaluing Germany and externally devaluing Japan as well as a plethora of smaller competitors,” Schvets said.
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