The Chinese government is conducting stress tests of a stronger yuan according to the domestic news site 21st Century Business Herald today.
Studies are being conducted by both the Ministry of Commerce and the Ministry of Industry and Information Technology to see what effects a yuan hike would have on China’s low margin and labour intensive export industries.
According to the initial results of the tests, which focused on textile, garment, shoe and toy exporters, every percentage point of yuan appreciation would erode one percentage point of their profit margin. This would be a serious blow to profitability since their net profit margin is often only 3 to 5 per cent, the newspaper said.
Really it comes down to what level of pain they are willing to bear on the low-margin export side in order to reap longer-term gains in buying power and higher value domestic industries. Thing is, if the Chinese trade surplus goes negative then all bets are off.