Ministries design exchange rate stress test for labor-intensive industries

China's Ministry of Commerce (MOFCOM) and the Ministry of Industry and Information Technology (MIIT) have designed a stress-test for China's labor-intensive industries, aiming to determine the effect of yuan appreciation on the textile garment, shoe-making and toy industry, reported today's 21st Century Business Herald.

"The concrete result has not come out yet," said an unnamed high executive from an industry association. But according to some industry associations' estimation, net profit rate of labor-intensive industries would fall by 1 percentage point if yuan exchange rate rise 1 percentage point.

The average net profit rate of China's labor-intensive industries is only 3 to 5 percent.

A 2 percentage points increase in Renminbi exchange rate would "have great impact on those industries and push the enterprises to the limit of their capability," said the high executive.

However, he noted that the ministries' stress test doesn't necessarily means that Renminbi will appreciate. "Whether Renminbi yuan will appreciate or not is another question."

"Our research found that a 1 percentage point increase in yuan exchange rate will lead to profits decline of 5 to 6 billion yuan (732.42 to 878.90 million U.S. dollars) of China's 50,000 textile garment exporters," said Wang Jin, an analyst with WebTextiles.Com.

The average net profit rate of the textile garment industry is around 3 to 4 percent. If yuan exchange rate increases by 5 percentage points, profits of the whole industry will decline by over 30 billion yuan (4.39 billion U.S. dollars).

Yuan exchange rate is critical to the recovery of China's foreign trade, said Zhou Shijian, a researcher with the University of International Business and Economics.

Yao Jian, spokesman of the MOFCOM, said yesterday that the stability of yuan exchange rate was the top policy target.

It will take 2 to 3 years before China's exports recover to pre-crisis level, he said. "China may face foreign trade deficit in the next six months, due to robust import and sluggish export recovery."