Finally, China has revalued its currency. The sudden, though not unexpected, appreciation of yuan was the result of mounting pressure from the global economic giants, which forced China to end theRecent report says that European ports are blocked with millions of garments from China, which have crossed the quota limits set by the EU-China textile agreement. Recently both the trading partners had reached an agreement on June 11th and limited the import of ten categories of textile products from China and agreed on annual growth rates of Chinese textile exports to the European market to a range of 8 percent to 12.5 percent from June 11th, 2005 to the end of 2007. This move was to protect the European manufacturers from sudden shock of market disruption by cheap Chinese imports and offer space to other textile exporting countries.
However, trouble started in July when Chinese sweater imports crossed the limit for 2005 followed by Chinese made trousers. EU Trade Commissioner Peter Mandelson points out that the problem has been caused by importers trying to beat the restrictions. According Mandelson, European retailers and importers tried to hard to bring in too many shipments before the cut off date.
Reports say that blocked goods stock is of very large volume and retailers would run out of stocks for winter and crucial Christmas sales period. As the orders are placed well in advance to replenish the store during the seasonal boom period, retailers are in a difficult situation as there is no clarity on the future trade, at least not before September. Since, several EU members are asking for a solution, there would be immense pressure for immediate dialogue between the trading partners, which could result in a winning situation for Chinese exporters as well as European importers. But that would defeat the entire purpose of having the Shanghai Memorandum of Understanding and displays the weakness of European Union for not taking care of the possible impact while signing the agreement.
On the other hand, a strict standing by EU would leave the European consumers in an awful situation where high product price tag would limit their Christmas shopping. A tough but a makeshift arrangement for the retailers could be beefing up sourcing or buying activities from other textile manufacturing countries that would be able to deliver goods at a reasonably low lead time. This near impossible task may be beneficial to brand loyalist consumers and keep the retail chains open.
US Dollar-Yuan peg. On July 21st, the People's Bank of China announced a moderate
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| revaluation of the Yuan. China has pegged its currency to the dollar in 1994, which has resulted in a fixed exchange rate of 8.28 yuan to the US dollar. This "hard peg" policy has come under criticism by the western countries and complained that this practice unfairly assists Chinese exports. According to financial experts, Yuan is almost 30-40 percent undervalued! The People's Bank of China's announcement of 2.1% appreciation of the yuan will bring the exchange rate to 8.11 yuan to a US Dollar now and as announced it would be now managed to fluctuate by 0.3% against the dollar in daily trading while moving up or down in a wider band of 1.5% against a basket of other currencies. This step has been appreciated by the west but has been challenged for being too small and expects more adjustment over a longer time framework. What this biggest economic event this year, means to textile business in China as well as to other prospective beneficiaries?
The very first impact is that Chinese textile and clothing exports would miss 2.1% price advantages against other competing courtiers like India, Pakistan, and Bangladesh etc. Now, if Chinese sellers absorb the impact of this among them, their profit margin would shrink. Otherwise, if textile and Clothing prices are increased, they would sell lesser volume. Experts have evaluated that if the Yuan appreciates by 1%, benefits reaped by Chinese textiles exporters will decline 6 - 10% or more as Chinese products lack value addition. According to initial estimates by the industry, for each 1 per cent appreciation of the Yuan, cotton textile sector would see significant reduction in export profit of 12 per cent, 8 per cent in wool, and 13 per cent in garments. However, some segment of the industry feels that Chinese products have room for increasing price and would not hit that adversely as discussed. The second impact is that the Chinese industry would become more dynamic and thrive hard to reduce cost of labor, raw material and add value to products. In fact, as China is a large importer of cotton and polyester fiber intermediates, after the appreciation of currency, prices of raw materials are expected to come down.
Amidst the wide speculation over the Yuan revaluation, textile industry remains as the point of focus for being the first receiver of the shock. The actual impact would be visible in the coming months, but if Yuan appreciates further, Chinese textile industry would have to bear difficult situation, which would benefit the nearest competing textile manufacturing nations. China had no options other than succumb to the pressure of US and EU that threatened with economic restrictions of much larger magnitude otherwise. 
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