The exchange rate of the Chinese yuan to the Hong Kong dollar broke the 1:1 mark for the first time this January. There is widespread expectation that China`s currency continues to strengthen over the year, giving rise to heated debate over how China`s foreign trade will be affected.
Since China eased exchange rate controls in July 2005, the yuan has appreciated by 5.83% against the U.S. dollar and over 6% against the Hong Kong dollar. After the yuan rose to 7.79 against the U.S. greenback on January 17, the Ministry of Commerce in China said it anticipated an additional 4-5% gain against the U.S. dollar this year.
The ministry`s statement indicated that the Chinese authorities want a strong yuan to cool China`s export boom. The ministry had earlier posted an article on its website stating its position to maintain a strong yuan in the years ahead.
Export Juggernaut
Beijing has been especially anxious to cool exports of auto part as a growing chorus of countries cry foul over China`s low pricing strategy.
Still, a stronger yuan is unlikely to significantly slow China`s export juggernaut. China`s automobile and auto parts exports have long been on an upward track that looks certain to continue into the near future, especially with the help of government cheerleading. Vice Minister of Commerce Wei Jianguo has said that China aims to increase its automobile and auto parts exports to US$120 billion a year, or around 10% of the world`s market, within 10 years.
China exported US$10.9 billion worth of vehicles and auto parts in 2005, up 34% from the previous year, with auto parts alone amounting to US$8.947 billion, up 22.82%. Over 50% of the exported products were made by foreign enterprises and joint ventures in China.
However, the export boom has not helped Chinese suppliers fatten up their slim profit margins and the rising Chinese yuan is sure to make matters worse. If producers are to survive, they will need to improve quality and margins by using better materials and technology.
Automobiles
China is just getting off the ground as an auto exporter, but its rise has been dramatic. According to the Ministry of Commerce, exports in the sector climbed to a record high of 340,000 units in 2006, more than double that of the previous year, with sedans increasing by nearly 200% to top 90,000 units.
China`s auto exports, however, accounted for a slim portion (0.7%) of the world auto market and its shipments are mainly bound for peripheral markets such as the Middle East, Latin America and Russia. Southeast Motors, for example, bagged an order from Iranian buyers for 8,000 vans this year. This is the biggest order ever secured by a Chinese auto brand and may entice other Chinese automakers to vie for even bigger orders in the future. It also opens an important window for Southeast Motors to expand its market share in the Middle East. Previously, Shanghai Maple Automobile was the largest Chinese car exporter, shipping 4,000 vehicles to Libya in 2006.
Shanghai Maple was the first Chinese automaker to take part in an international auto show in Detroit, where in 2005 it debuted its Geely sedan. Last year, Chang Feng Motor, a joint venture between a Hunan automaker and Japan`s Mitsubishi, was represented at the largest auto show in North America. The company aims to ship vans or sport utility vehicles (SUVs) to the U.S. within three years. Chang Feng has also shipped trucks to the Middle East and Africa.
A former producer of military vehicles, Chang Feng partnered with Mitsubishi to make SUVs. It now turns out more than 100,000 SUVs and vans a year. At the Detroit auto show last December, it sought American partners or agents to help introduce its trucks and vans to the U.S. market, where annual auto sales slightly slipped to 16.5 million units in 2006 from 17 million units in 2005.
Regarding the ambition of Chinese automakers to explore the American market, Bill Pollack, chairman of car agent Chamco, notes that, "They have first to make their cars fit the American specifications and quality demand."
Consolidation
As Chinese automakers race to tap into the international market, the Ministry of Commerce is reportedly working out a plan to consolidate the auto industry in China. It aims to weed out 700 of the weakest auto exporters, which number about 1,200 now, to prevent severe price competition among Chinese auto exporters. The ministry achieved a similar effect earlier in the motorcycle industry, encouraging around 45% of the producers in that segment to withdraw from the export market.
"Auto exports have a lot of growth potential in China, but the market needs to be more orderly," said Zhang Chi, an official at the Ministry of Commerce. According to Chinese customs statistics, 1,175 automakers shipped automobiles abroad in 2006, but nearly 670 of them had exports of less than 10 units and their autos were mostly assembled from used auto parts.
