China sneezes and textile world may catch cold soon

The People’s Bank of China (PBC) devalued the Renminbi (RMB/Yuan) on 11 August by 2015 by 1.9%, the largest one day devaluation since 1994. The ‘daily fix’ of the currency to the US$ moved out to almost 6.23 Yuan versus 6.1162 Yuan the previous day. Although the move spooked global markets and raised yet more concerns about the health of the Chinese economy, it will be interesting to gauge its impact on global trade, particularly that of textiles.

Currency devaluation is a discreet decision by the government to lower the value of its currency in relation to other global currencies. This is obviously possible only where the government either completely or partially determines exchange rate movements.

Immediately, local prices of textiles goods in China rolled over but in terms of US$ they declined sharply making them cheaper in the international markets. For example, polyester staple fibre prices in the week ended 14 August were flat in Yuan terms from a week ago, they were down US cents 5 a kg or 5% in the reference period. Similarly, polyester filament yarn prices were down US cents 5-8 a kg in similar comparison. Correspondingly, PSF and PFY prices were down US cents 3 in India unchanged in Pakistan.

India could lose on two counts, one on competition and other on pricing of high value added products. As a country competes for exports with China in sectors like textiles, it could be hit. Equally, it could be hit if China’s imports come down significantly since goods will be dearer for import. Else, China may import low value added items like cotton or grey yarn or grey fabric from India and convert them into high value apparels. Here, it will hit India’s exports since Made in China will be cheaper than Make in India.

The flash devaluation, by as much in one week as the currencies have moved in the last one year, has sent shock waves through the textile markets, upsetting the long-held and somewhat complacent view, at least in terms of that currency pairing, the RMB was set to rise with the US$. China has been facing serious economic challenges like speculation on the stock markets, slowing growth, rising labour cost, etc. The stock exchange burst came at a time when textile producers diverted cash flow into the market instead of paying their raw material suppliers. Now that the stock values have eroded, forcing more into export market was the only option. And this can be brought over by devaluing the currency. Which the Chinese government did.

Courtesy: Weekly PriceWatch Report