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Business & Financial

Changing Chinese Ground Rules

Robert S. Reichard, Economics Editor

A shifting trade strategy will continue to bear close monitoring. It's now pretty clear that by year-end, the value of China's currency, the yuan, will be running somewhat above recent levels — hopefully enough above at least to start slowing the tidal wave of Chinese shipments abroad. And it's coming none too soon for textiles and apparel, as U.S. imports of these products recently have been running 25-percent above a year ago —  in sharp contrast to the 3.5-percent increase in imports of these products from all other countries. Even the Chinese are beginning to realize these huge increases in their exports can't be maintained indefinitely. But aside from correcting some huge trade imbalances, there are other compelling reasons for a shift in Beijing thinking. A stronger yuan lowers costs of imports by China, which would help many Chinese manufacturers who have been complaining increasingly about the high cost of energy and other raw materials they must import. Revaluation also would allow China to boost interest rates — a move urgently needed to dampen inflationary pressures; keep the economy from overheating to the point at which it could cause a real-estate crisis; and reduce the need for its central bankers to purchase low-yield U.S. Treasury securities.


Gauging The Results
Chinese currency moves will still leave one big question unanswered: How much upward yuan revaluation will eventually be needed to level today's badly-tilted international playing field? The answer depends on whom one talks to - with estimates ranging from just over 10 percent to as high as 50 percent. Textile World sees the yuan's value having to increase some 20 to 40 percent if current trade imbalances are to be corrected. But odds of this happening overnight, or even over the next year or so, are practically nil. Internal Chinese political pressures would seem to rule out any big one-shot move. Much more likely: a slow, gradual upward revaluation such as occurred in the 2006-2008 period just prior to the recent worldwide downturn. Equally important, it will take time for currency changes to work their way through the system and ultimately make a real difference. Federal Reserve Chairman Ben Bernanke recently noted that moving the exchange rate would not have a significant short-term effect. Given this kind of thinking, don't expect any quick miracles. Thus, while the recent huge monthly increases in incoming Chinese shipments are not likely to be repeated, it would be unrealistic to expect any big slowdown in overall textile and apparel imports over the next few quarters. Best bet: anywhere from a 5- to 10-percent boost over the current year. On the other hand, if all goes well, U.S. textile and apparel import gains should begin to taper off - averaging out in the tolerable 3- to 5-percent range over the 2011-2013 period.

Another Long Look Ahead
Meantime, new Bureau of Labor Statistics employment projections provide another perspective on how the U.S. textile and apparel industries will be faring over the coming years. The key finding: Jobs will decline an eye-opening 48 percent over the decade ending in 2018. But no need to push the panic button - the slippage isn't nearly as bleak as first blush would seem to indicate. Remember, we are talking 10 years here. Convert this 48-percent figure to a compounded annual rate, and the yearly pace of decline drops down to a not-all-that-bad 4 percent. Further consider that during the first year of the forecast - recession-ridden 2009 - employment dropped 16 percent. Upshot: Annual slippage over the next nine years is likely to be only somewhere in the 3- to 3.5-percent range. Moreover, translate this annual job decline into an annual decline in industry output,  and things begin to look even better. This conversion from jobs to production can best be accomplished by adjusting employment projections for productivity gains, which are likely to continue running at about a 2- to 3-percent annual rate. Do the math, and annual textile and apparel production declines are estimated at only around 1 percent or so. That's a lot better than the average double-digit drops of the last three years - and pretty much in line with TW 's long-term demand forecasts spelled out in last month's column (See "Business & Financial: An Encouraging First Quarter," April 20, 2010).

May/June 2010


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