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Strong Yuan No Threat To Hong Kong
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Hong Kong Trade Development Council (TDC) chief economist Edward Leung expects the yuan's impact on Hong Kong companies engaged in manufacturing, sourcing and trading activities on the Chinese mainland to be limited.
"The Chinese mainland now accounts for nearly half of Hong Kong's total exports and is projected to chalk up further robust economic growth during 2007," he observes.
Leung points out those higher operational costs are currently being absorbed by manufacturers. "We are not seeing any significant costs being passed on to the buyer in the current environment," he maintains. "A 5%-10% appreciation in the yuan should have a small impact on Hong Kong's export competitiveness in the near term."
The reason for this is twofold. "Price sensitivity is more pronounced in the US than it is in European markets," claims Leung, adding that the market saturation of low-cost products by Chinese companies is also preventing additional costs from being passed on to consumers.
Leung notes that since June 2005, the yuan has climbed steadily by 6.2% against the US dollar. "During the same period the yuan appreciated 18% against the Japanese yen and remained static against the euro," he remarks, explaining that the sharp increase has more to do with the yen depreciating than the yuan increasing in strength.
Overall, on a weighted average basis against a basket of currencies used by mainland authorities to float against the yuan, the currency has appreciated by 5.5% over the last two years.
"To what extent a stronger yuan affects companies and their competitiveness in different manufacturing sectors very much depends on how much of their mainland operations are conducted in the local denomination," observes Leung, revealing that figures produced by a TDC survey suggests that most businesses are operating with a 30%-40% exposure to the yuan.
"The yuan appreciating in strength has added about 3%-4% to manufacturing costs, which we think is sustainable," says Leung, who believes there are several other factors of more immediate concern to manufacturers.
These include an increase in raw material prices, sharply rising labour costs and a labour shortage in the Pearl River Delta. "For the last two years, year-on-year labour costs have risen by double-digit figures," Leung notes.
A big challenge for manufacturers today, therefore, is finding and keeping good workers. "Over the medium term, higher wages and labour shortages will likely remain irreversible, and these issues should be taken seriously by Hong Kong manufacturers," Leung adds.
The cost of meeting stricter environmental compliance regulations in European markets is also having an impact on total manufacturing costs. "In most cases the impact of a strong yuan is only number three or four on the list of concerns for Hong Kong manufacturers," Leung believes.
China's new policy of reducing resource consumption and pollution through a series of measures targetting the export sector has also introduced new challenges for many manufacturers.
These measures include tighter pollution controls, a decrease in export tax rebates, and adjustments in the Prohibited Commodity Catalogue for Processing Trade.
"To combat these challenges manufacturers must try hard to move up the value chain or they will be faced with increasing difficulties," Leung maintains. "However, Hong Kong manufacturers are known for their considerable resilience and ability to adapt to new challenges."
Hong Kong manufacturers are already using different strategies to increase competitiveness, including producing branded products and adding value to products through design and strengthening quality.
Many manufacturers are also investing in advanced technology to produce higher-end products. "The meaning of 'technology' can be quite broad," Leung admits. "Besides front-end R&D activities, it also covers technological areas like innovation, commercialisation, application and industrial engineering."
One excellent example is the quality and design of toys, which is being improved by using advanced technology in order to stay competitive relative to local mainland manufacturers.
"The popularity of the cyber world has seen another product development trend in the form of the assimilation of real and virtual toys," Leung says.
Toys capable of linking with the Internet so that fun can be extended beyond the physical plaything is another strength Hong Kong manufacturers are exploiting.
"Very significantly, Hong Kong manufacturers' business chains directly connect final products with global markets and buyers," Leung notes, explaining that this encompasses all the phases a product goes through before it reaches the customer - from raw materials to parts manufacturing, assembly and marketing.
"Production on the mainland is facilitated by an efficient network of supporting industries and services, which has greatly enhanced the competitiveness of Hong Kong companies in terms of productivity, quality, reliability and delivery."
Electronic products are another area where technology is being implemented to develop innovative items that secure a competitive edge. "For instance, electronic products of relatively higher technology content accounted for only 26% of Hong Kong's total exports in 1990, but have now become Hong Kong's major export earner, accounting for about 48% of total exports last year," Leung says.
Moreover, the electronics industry itself has strong managerial skills, is experienced in international trade and supply chain coordination and is increasingly adopting advanced manufacturing and partnerships through information technology; all of which are seen as essential to future competitiveness.
According to Leung, Hong Kong's mainland-integrated supply/logistics chains are also helping enterprises to exhibit the key strengths of efficiency, convenience and competitiveness. "An increase in the value of the yuan should not significantly harm these ever-growing business chains," says Leung.
"One of Hong Kong manufacturers' key competitive advantages is an unmatched speed and flexibility in meeting fast-changing market demand wherever it arises - in particular, fashion-driven or time-sensitive demand which requires speed to be combined with reliable quality, fast delivery and competitive pricing."
Another area taking advantage of its international network and accumulated skills is the Hong Kong supply sector's role as a supplier of quality, branded fashion collections and as a regional sourcing hub.
"Our flexibility and pragmatism have brought us to a unique position among the world's most prosperous economies, and I see every reason for these strengths to continue, currency fluctuations notwithstanding," Leung concludes.
TEXT BY CHRIS DAVIS
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