What is in it for Bangladesh?
Thursday, 10 June 2010
Alamgir Morshed
China is under renewed pressure from the world leaders and policy makers, especially the U.S. to review its exchange rate policy for its domestic currency, known as Chinese Yuan or the Renminbi. It is argued that Chinese exporters get undue advantage because of the artificially undervalued or cheap Yuan. Currently, one U.S. Dollar is equivalent to 6.82 Yuan and a unit of Yuan is equivalent to Tk 10.14. Yuan is said to be undervalued by 30 to 50 per cent based on Purchasing Power Parity (PPP) and various other economic models like the Big Mac Index and Starbucks tall latte Index. Since 2005, despite rising exports and 292% increase in the country's foreign exchange reserve to $2.4 trillion as of March 2010, Yuan appreciated only by little over 17%. In February, China recorded 45.7% export growth over a year earlier and in 2009 its total export was almost US$1.2 trillion.
In July 2008, China shifted from a managed floating exchange rate regime and re-pegged Yuan to US Dollar at around 6.83 Yuan per dollar as an austerity measure to tackle the impact of global economic crisis. The Yuan was allowed to move in a narrow band of +/-0.5%. As the global economic turmoil began to gradually settle down, China again came under mounting pressure from the international community, particularly from the U.S., to reconsider its exchange rate policy in order to reflect a more realistic exchange rate for the Yuan.
There are talks of various options which might be considered by the Chinese authorities such as de-pegging Yuan from US Dollar to a basket of currencies, gradual appreciation of Yuan, widening the daily trading band or a big one-off move. In any of the measures, Yuan is expected to appreciate against other currencies.
The question we need to ponder on is what does it mean for Bangladesh since China is one of its major trading partners?
According to Bangladesh Bank and Export Promotion Bureau (EPB) website reports, Bangladesh's total trade with China in 2008-09 was around $3.5 billion (at an USD/BDT exchange rate of 69), which constitutes around 10% of the country's total trade value of $36.6 billion. In 2008-09 Bangladesh imported Chinese goods worth of US$ 3.4 billion and exported $97 million worth of local goods to China. In the last three years, import from China grew by 34% while export to China grew by 30%. In terms of trade value, China stands out as the second most important trading partner of Bangladesh, second only to the U.S. and above India. In 2008-09 total trade value with U.S. was $4.5 billion and with India it was $ 3.1 billion.
Over the years, China has become a major supplier of capital machineries and various other raw materials for the textile and garments industry of Bangladesh. In 2008-09, 65% of total import from China comprised of textiles and textile articles, machinery, mechanical and electrical equipment. Thus, assuming all other factors remain constant, a stronger Yuan will mean higher cost of imports for the Bangladeshi companies, especially for the textiles and garments industries, which may further challenge the already thin margin of Bangladesh's RMG exports. Consumers may also feel the pinch of higher import cost due to heavy reliance on Chinese consumer products sold locally.
However, on the positive side, a stronger Yuan will help boost exports of Bangladeshi products to China which at the moment is significantly lower than Chinese exports to Bangladesh.
The most positive outcome of a strengthening Yuan would be the immense possibility of Chinese investment flows to Bangladesh especially in the labour intensive segments. With an appreciating Yuan coupled with increasing labour costs in China, labour intensive Chinese industries would explore opportunities of setting up factories in other low cost base countries like Bangladesh. As of January 2010, 186 Chinese investment proposals worth $320 million is said to have been registered with the Board of Investment (BOI). Moreover, strengthening of Chinese Yuan may trigger appreciation of other regional currencies like the Singapore Dollar, Malaysian Ringitt and Korean Won amongst other currencies, which may also give Bangladeshi exporters a pricing advantage over its regional counterparts.
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The writer is Director and Head of Global Markets, Standard Chartered Bank
China is under renewed pressure from the world leaders and policy makers, especially the U.S. to review its exchange rate policy for its domestic currency, known as Chinese Yuan or the Renminbi. It is argued that Chinese exporters get undue advantage because of the artificially undervalued or cheap Yuan. Currently, one U.S. Dollar is equivalent to 6.82 Yuan and a unit of Yuan is equivalent to Tk 10.14. Yuan is said to be undervalued by 30 to 50 per cent based on Purchasing Power Parity (PPP) and various other economic models like the Big Mac Index and Starbucks tall latte Index. Since 2005, despite rising exports and 292% increase in the country's foreign exchange reserve to $2.4 trillion as of March 2010, Yuan appreciated only by little over 17%. In February, China recorded 45.7% export growth over a year earlier and in 2009 its total export was almost US$1.2 trillion.
In July 2008, China shifted from a managed floating exchange rate regime and re-pegged Yuan to US Dollar at around 6.83 Yuan per dollar as an austerity measure to tackle the impact of global economic crisis. The Yuan was allowed to move in a narrow band of +/-0.5%. As the global economic turmoil began to gradually settle down, China again came under mounting pressure from the international community, particularly from the U.S., to reconsider its exchange rate policy in order to reflect a more realistic exchange rate for the Yuan.
There are talks of various options which might be considered by the Chinese authorities such as de-pegging Yuan from US Dollar to a basket of currencies, gradual appreciation of Yuan, widening the daily trading band or a big one-off move. In any of the measures, Yuan is expected to appreciate against other currencies.
The question we need to ponder on is what does it mean for Bangladesh since China is one of its major trading partners?
According to Bangladesh Bank and Export Promotion Bureau (EPB) website reports, Bangladesh's total trade with China in 2008-09 was around $3.5 billion (at an USD/BDT exchange rate of 69), which constitutes around 10% of the country's total trade value of $36.6 billion. In 2008-09 Bangladesh imported Chinese goods worth of US$ 3.4 billion and exported $97 million worth of local goods to China. In the last three years, import from China grew by 34% while export to China grew by 30%. In terms of trade value, China stands out as the second most important trading partner of Bangladesh, second only to the U.S. and above India. In 2008-09 total trade value with U.S. was $4.5 billion and with India it was $ 3.1 billion.
Over the years, China has become a major supplier of capital machineries and various other raw materials for the textile and garments industry of Bangladesh. In 2008-09, 65% of total import from China comprised of textiles and textile articles, machinery, mechanical and electrical equipment. Thus, assuming all other factors remain constant, a stronger Yuan will mean higher cost of imports for the Bangladeshi companies, especially for the textiles and garments industries, which may further challenge the already thin margin of Bangladesh's RMG exports. Consumers may also feel the pinch of higher import cost due to heavy reliance on Chinese consumer products sold locally.
However, on the positive side, a stronger Yuan will help boost exports of Bangladeshi products to China which at the moment is significantly lower than Chinese exports to Bangladesh.
The most positive outcome of a strengthening Yuan would be the immense possibility of Chinese investment flows to Bangladesh especially in the labour intensive segments. With an appreciating Yuan coupled with increasing labour costs in China, labour intensive Chinese industries would explore opportunities of setting up factories in other low cost base countries like Bangladesh. As of January 2010, 186 Chinese investment proposals worth $320 million is said to have been registered with the Board of Investment (BOI). Moreover, strengthening of Chinese Yuan may trigger appreciation of other regional currencies like the Singapore Dollar, Malaysian Ringitt and Korean Won amongst other currencies, which may also give Bangladeshi exporters a pricing advantage over its regional counterparts.
.....................................
The writer is Director and Head of Global Markets, Standard Chartered Bank