[VIEWPOINT]A great opportunity in ChinaWhile the average return on Chinese capital’s overseas investments is about 13 to 14 percent, the return from investing in U.S. treasury bonds is only 3 percent, the Chinese weekly magazine Liaowang reported last week, quoting an International Monetary Fund report. The magazine seems to have cited the figures in order to argue that China is intentionally investing in U.S. treasury bonds, whose yields are lower, in order to quiet Washington’s strong demands that it boost the value of the Chinese yuan.
The weekly cynically pointed out that as China has begun to emerge as a capital exporter, the relatively poor country is helping the wealthy United States. It also implies the uncomfortable feeling of the Chinese towards the demands from the Western world, the United States in particular, that it revalue the yuan.
Despite internal opposition in China, Beijing announced Thursday that it would replace the yuan’s decade-old fixed peg to the U.S. dollar with a managed floating system, based on a basket of currencies. The increase in the value of yuan was smaller than expected, and there are not likely to be great effects on the Korean economy immediately.
However, the difference in competitiveness among products exists and is influenced by the changing value of the yuan, so we cannot be totally indifferent. Moreover, depending on the difference in competitiveness between Korean and Chinese products, the influence will surely change.
Computers and related parts will benefit most from the revaluation of the yuan. Chinese computer products have been in heated price competition not only in the domestic market but overseas, so it is hard to lower the price further. Under this circumstance, the value of the yuan has been raised, so Chinese computer makers won’t be able to compete with Korean products with an edge in price. There is even a possibility of cutting the supply of computers voluntarily. Therefore, exports of Korean computers to China are expected to increase.
Home appliances, textile, apparel, light industrial products and non-metal goods are expected to have a little more edge. These products have been in intense price competition with Chinese products in the Third World, so they will gain from the revaluation of the yuan. However, the benefit of the yuan’s rise is inevitably limited, because it is highly likely that the demand that would otherwise have existed for Chinese products will switch to goods made in developing Southeast Asian countries, not to Korean products.
The goods that would be disadvantaged would be chemical and some steel products. These items greatly depend on the Chinese market, and as China’s export of finished products decreases, it is likely to import fewer raw materials and intermediate products from Korea. The semiconductor industry will be hurt a bit. Just as with chemical products, the diminishing demand in China would lead to a decrease in exports there, but the loss could be partly offset by an increase in exports to the Third World market as a result of the decrease in Chinese exports.
The longer-term future is more problematic. Although the margin of the revaluation of the yuan was not so big this time, as the value of the Chinese currency is gradually raised in the future, the influence on Korean products will surface in various forms. Therefore, we need to review and analyze the potential effects in each category. By breaking down the characteristics of each product category, we need to make accurate forecasts on the changing environment of Chinese companies and the dynamics of competition among Chinese and other rival products overseas.
Let’s look at an example. According to a report presented earlier this month by researcher Wang Jun of the China Center of Information Industry Development, the profit-to-earnings ratio of Chinese electronic and information products was only 4.1 percent, due to severe competition in domestic and overseas markets. However, a report by the State Administration of Foreign Exchange in 2003 found that a one-percent rise in the value of the yuan would result in a 48-percent decrease in profits for export-driven companies (in which exports made up more than 80 percent of total trade volume), and a 2.5 percent increase in profits for import-driven companies (in which imports made up more than 80 percent of total trade.)
Judging from those reports, the profit-to-earnings ratio of the export-driven electronics and information industries will drop from 4.1 percent to 0.164 percent if the value of the Chinese currency rises by two percent.
In other words, just a two-percent rise in the yuan could result in a drastic decrease in China’s exports of some products. In contrast, it could be a big opportunity for Korean companies to increase exports.
It is not news that thorough calculation and accurate preparation can guarantee continued development of Korea’s export industries. But the revaluation of yuan could be a great opportunity, if we play it smart.
*The writer is a professor of economics and international trade at Catholic University of Daegu. Translation by the JoongAng Daily staff.
by Shin Ju-sik